Taking advantage of Immediate Financing Arrangements can also provide clients with protection from volatility, says advisor
Immediate Financing Arrangements (IFA) can help a client sleep at night during these times of “financial instability”, according to an indutsry insider.
Chris Karram, founder and chief strategy officer at SafeBridge Financial Group, believes that this type of cash surrender value can provide more certainty for the risk-averse investor than real estate, the markets and Universal Life Insurance.
Ideal for business owners or high-net-worth clients, the vehicle provides an anchor amid volatility and provides access to funds when they may need them the most. Karram said by taking some, or all, of their money off the traditional investment product shelf, it provides protection from market swings.
He told WP: “There is no other vehicle that provides us with the consistency, the historical track record, or frankly the sustainability of the actual asset itself, than life insurance. As a result, it's something that is absolutely worth exploring for your clients.”
IFA can be used by those that “understand leverage” and are looking to build their wealth or business. Rather than have capital in an insurance policy or investment that’s illiquid, it gives them access to it at all times.
For example, a business owner can fund a large life insurance policy that protects his family and covers terminal tax liabilities, which can become significant. At the same time, that client can borrow those funds immediately, allowing them to repurpose the capital into their portfolio.
Karram said: “They are now left in a capital neutral position with an insurance policy that has a long-term coverage amount that will be there regardless, no matter what point they pass away, as well as a cash value inside the policy, which continues to grow while they still repurpose those funds into the rest of their real estate or investment portfolio or otherwise.”
He added: “That's a money in, money out capital neutral decision that provides all the same benefits and 100% liquidity to their money.”
The strategy, which the big banks have been doing for years, is becoming normalized with more lenders coming into the space. From a lender’s perspective, Karram said there is no better opportunity, with the dividend guaranteed and the fact the cash value inside the policy can’t go down in value.
From a client’s perspective, getting access to the funds and putting yourself in a position where your capital is liquid is not nearly as complicated as it once was. For an advisor, understanding the strategy and knowing who it is most suitable for is, as always, fundamental. IFA, for example, is a good option for people who are constantly investing year after year into the markets or real estate.
“We're encouraging you to just flow it through an insurance policy. Then you’re back in the same position but now you've got a large life insurance policy and a secondary asset, which is significant.
“It's not recommended for anyone who's looking to use those funds to buy a boat, or pay for education or consumer expenses. It’s really for more emerging wealth, the high-net-worth individual who's in a position where they have money to invest. We're just trying to find a better flow through to double down and take advantage of that opportunity.”
For those who don’t have enough money for retirement, this is not for them. It can, however, act as a replacement or supplement to an RRSP or TFSA. SafeBridge offers a Personal or Corporate Retirement Strategy. It’s a similar approach to the IFA except it’s accessing funds during the client’s retirement years.
He explained: “The major benefit is that when you access your funds, it's structured as a loan and you’re accessing those funds tax free. So you will not get a taxable event or any kind of tax bill at the end of the year.
“You're basically creating a defined contribution, getting close to a defined benefit pension plan, because you know how much money is in there, you know how much money you can access. So, when you're 65, your cash is there, it can't go down in value and you know exactly how much you can access on a move-forward basis – and you can do so tax free.
“You're also positioning yourself with those funds, which are never going to be greater than the amount of insurance you actually own. Even when the insurance policy eventually pays off that loan that you've used for retirement access, there will still be a large amount of life insurance that will be left to your family.
“As a result, you’ve built a retirement plan, pension plan - for lack of a better term – and you've lived off of those funds. And then the insurance policy itself also covered off that ‘debt’ and also ensured that your family was fully protected with a large, lump sum.”
