What if you could accumulate wealth tax-free? What if that wealth could be protected from creditors? What if you could secure a tax-free retirement? What if we told you all of this is possible?

There are strategies the ultra-wealthy have used for generations to not only secure their retirement, but to create inter-generational, tax-free wealth. Here’s a secret: These strategies are not reserved for just the ultra-wealthy.

During this presentation, David Babinski, a Business Consultant and member of your Family Office Team, introduces you to one of these strategies. Through case studies exemplifying the strategy, you will learn:

  • How the strategy works,
  • The results that can be achieved with the strategy, and
  • The benefits of using this strategy.

Transcript (edited for clarity)

Welcome, everyone. Thank you for joining us for the monthly webinar. This month we’re going to talk about alternative family office strategies for a tax-free retirement.

Focus For This Discussion

Income in retirement, tax savings, when you’re working with the Family Office group, what we’re mainly focused on is how to arrange your financial situation so that we can optimize any potential tax saving strategies we have. So, what are we discussing? Really, if you’ve seen any of our other content or been through any of our one-on-one meetings, we talk about the taxation of your portfolio. There’s really three different ways your investments and your holdings can get taxed. I use the analogy of the three buckets: you could be taxed now on an annual basis, tax postponed like a retirement account, or tax-advantaged. And we spend an awful lot of time working towards getting your investments set up so that they are in the tax-advantaged bucket.

Premium Finance Life Insurance — Who Qualifies?

Today we are going to talk about today one specific tool that’s very effective that we have access to called premium finance life insurance. This isn’t for everyone, and you have to qualify in a couple of different ways. It’s really reserved for high-net-worth and relatively healthy clients. And one of the terms we’ve used before, it’s like supercharging the supercharges Roth IRA. It’s really like doubling down on accumulating tax-advantaged income for retirement.

What is my goal for today? It’s really twofold because this is such an advanced topic. It’s so specific to everyone’s own situation that my goal is to just give you an overview of how it works and how to qualify and then make a one-on-one appointment.

The second goal, obviously, is to introduce the concept. Talk about how it compares and contrasts to your regular, I use the word conventional, life insurance and how it’s a little bit more advanced. And then we’re going to talk a little bit about this leverage and show a little case study on how it can affect your income in the retirement years.

Introduction to David Babinski – Financial Services Expert

For those of you that don’t know me, I’m David Babinski. I’ve been in financial services for over 28 years. When I started in the financial services industry, I worked primarily with people who were either retired or on the transition to retirement. And I’ll tell you over and over and over, people would say, “Boy, I wish I met you 10, 20 years before I retired, five years before we could have set things up totally different.

Now, with the TSP in the Family Office group, we have the opportunity to actually meet with and work with folks prior to their retirement. There’s just so much perspective that we could bring from that experience of working with people who were already retired.

Now, let’s talk a little bit about that investment philosophy and strategic planning for high-net-worth individuals. What strategic things can we do some today that could make a huge difference in retirement? Like I said before, every situation is different. We do have some tools in our toolbox. But I say this all the time, retirement is really not a net worth problem. People say, “Oh, when I get to a certain amount of retirement accounts, a certain amount of savings, I can retire.”

Retirement and Taxes

Retirement is an income problem. And one of the biggest unknowns with your income is the taxes. Medical and healthcare is a big expense, but it’s really the taxes. So, strategic planning. Can we get ahead of that tax calculation by moving some of the sources of retirement income into a tax-advantaged or completely tax-free bucket? It takes the unknown of what are tax rates going to be, when will certain, things be taxed, when will the government force us to take money out of retirement accounts out of the equation.

To that end, the Roth conversion, it’s a huge tool that we have right now. When the Roth first came out, you were phased out from being able to contribute, which most still are, but you’re also phased out from doing any conversions. That’s changed. I talked to someone just the other day who said, “Oh, my CPA said I don’t qualify for a Roth.” And for everyone that we work with, that’s true. But you do qualify for a Roth conversion. We spend a lot of time on Roth conversions.

Opportunity Zones

Another strategy we have in this tax-advantaged bucket three is opportunity zones. A lot of people right now are selling real estate. Capital gains are embedded. Even if it’s a primary residence over a certain amount, you’ve got a capital gain. We have the ability to look at this legislation that allows for the deferment of that capital gain. But more importantly, the growth on any of those investments pushes forward into the future completely tax-free. These are just some for instances of our investment philosophy on how we’re going to focus on a tax advantage retirement.

Premium Financed Life Insurance

But really, one of our most impactful strategies is premium financed life insurance. How we use it is a little bit different than most, so I do have to give a bit of a disclaimer. What you do know about life insurance, this might be completely different. This is an advanced topic we’ve been working with for decades. We’re going to talk high level about how it compares and contrasts to what you may already know and then slowly fold in how it’s a little bit different. I do understand some of these concepts might not be clear the first time you hear them, and I will be a little bit repetitive. But as we move on it will become clearer. Again, my goal today is to convey enough of how the concept works and what we’re doing so that you can say, “Hey, I want to see if this could apply to me. Do I qualify?”

Two Classes of Life Insurance

So, let’s talk a little bit about insurance, the concept, introduce the components or just give you a refresher on the components, and then how we use life insurance.

From a big picture view, the concept of insurance, you’ve got two real classes, permanent and term. They’re really self-explanatory, meaning permanent is forever and our goal when we are looking at a permanent type of life insurance is something that eventually is going to mature or pay off, and term is just for some period of time, we just want to have insurance coverage if the unexpected happens.

If you have 10 years-worth of work left or if you have 15 years-worth of your working career left and you have children that need to get through college and you’ve got a spouse, you want to replace that potential lost income with the term policy. It’s very inexpensive and all you’re paying for is that life insurance coverage. Permanent is a little different. It’s going to have accumulation value.

When insurance was first brought into existence and the regulations were formed, there were a lot of benefits from the tax side and those have been maintained for well over 100 years, meaning your death benefits are going to be tax-free. If you pull money out, it’s your basis first, which is tax-free, and then you’re going to take loans against your policy, which again, is tax-free. Why? Because when it matures, it’s going to pay off tax-free. So, there are a lot of embedded tax benefits inside life insurance.

But what happened is people started to abuse that, I’m talking about 40, 50, 60 years ago, meaning, I want one dollar of insurance above my cash so I just have an unlimited Roth IRA, if you will. And the government came back and over various amendments to these laws, said, “No, the insurance company has to be at risk for a certain amount for this to qualify as a qualified life insurance policy.” And that started to build the framework.

The Advantage of Life Insurance

How we use the life insurance policy is we basically overfund or fund as much as the law will allow, and that’s where we’re getting these huge accumulation values. That’s where the premium and the accumulation value in the death benefit all come into play. We’re using it slightly differently than just covering the need. We want to stuff as much money into these policies as legally permissible and still maintain all the tax benefits. That’s just your basic concept of insurance.

Now, let’s introduce how it works with how we use the life insurance. It’s two-prong approach. The first one you’ve probably heard a lot about: personal family financing. On one side, we’re basically building up a whole life policy where you can bank on yourself and have a savings account. And we use this a lot with our clients that are actively investing in real estate and some other things where you could become your own bank.

On the second side, the second prong, we use indexed universal life as that supercharged Roth. So, again, we’re not going to talk about the whole life, but that’s the reserve savings account. Sometimes we’ll call it the volatility buffer. We are building up a tax-free bucket of money that you can access all throughout your life, not just for retirement. And then on the other side, we’ve got this concept of the indexed universal life, which is really designed to give you income tax-free in retirement.

That’s why we call it the supercharged Roth. Our clients are not relying on banks. Once we get these programs started, you don’t have to apply. You don’t have to have credit checks. There’s not this big delay. Once you start building up the bank on yourself, you pick up the phone, you send in a piece of paper and say, “All right, I want to access my capital all tax-free.” And then on the other side, again, it’s that tax-free income retirement. That’s what we’re going to drill down on today. How do we get access to that? How do we grow that with a little bit of leverage? And that’s where this premium finance comes in.

Premium Finance

The introduction to premium financing, in practice, is pretty simple. We still have the permanent versus term. This is permanent. You still have the accumulation value we talked about. You still have your annual premium and your death benefit. Now we’re introducing the concept of leverage. We’re using borrowed capital for investing to get profits, basically earning on arbitrage on what we’re going to borrow. That’s greater than the interest you’re going to pay on what we borrow.

Then the concept of collateral. Collateral is something pledged as security for repayment of a loan. Everyone’s familiar with purchasing real estate. A very common formula that a lot of people will use is 20% down and borrow 80% from the bank. That’s leverage – 20 over 100 or 20 percent down – and that’s collateral – the property that you’re buying. It’s the same exact concept that we’re going to talk about here only we use leverage and collateral slightly differently.

So, strategy one on the whole life: Our sophisticated clients are using that bank on yourself to source their down payment for real estate. We’re building up a bucket of money that’s accessible to you immediately and you could use that to then leverage other things like real estate.

Index Universal Life

The strategy we’re going to dive into now, the IUL, the index universal life, is the supercharged Roth. The next level of this is setting up that monthly income but using some leverage. I’ll give you an overview based on kind of an average and then we’ll see how it will fit in for most people.

With a conventional life insurance policy, you pay five thousand dollars a month, sixty thousand dollars a year, for the next 10 years, and then you could start taking some income out of it. That’s just your conventional policy with the premium that’s going for a certain number of years.

In concept, how the conventional premium finance would work, and this is where it gets a little tricky, is you could have a policy with five or six times that amount going for the same amount of time, but you only have to put in that initial premium. This is where leverage comes in. Just like with the property, if you were going to put 20% down and the bank was going to give you four or five times that, that’s leverage. And that’s where the premium finance industry came into existence.

Although this is a great option, you see significant returns, there is some risk involved and a lot of people who were involved are scared away because some of these policies weren’t set up correctly. And what we’ve seen, one of the biggest issues with a premium finance case, is that concept of collateral. You’ll get four or five, six times your money going into the policy, but you’re going to have to post some collateral. We have found that, in that conventional premium finance, if there’s going to be issues down the line with these types of policies, it’s the collateral that causes the problems every year. So, what does that mean? You have to pledge, say, a securities account and the bank will take that as collateral, and they’ll lend you this money. We’ve gotten around this because we will remove the need for outside collateral.

How It Works

This is where it gets pretty interesting. It’s much more conservative than your conventional premium finance where you’re putting 20% down and just think of it as real estate. The way that we design these, and this is kind of the secret sauce here, is we’ll put 50% down. We’ll go from a six-times leverage to a two-times leverage, 50% percent down, and it removes the need for outside collateral. Without the increase in leverage, the policy itself becomes the only collateral the bank will need.

Again, this is where most of these policies got into trouble in the past. And there’s some overture in the industry that these are somehow risky. It’s that outside collateral that got so many people into trouble. When we remove that, it’s less leverage, less return – if you put 50% percent down to buy a rental property, you’re not going to make as much money – but it’s way more conservative. For the clients that are in the range where you’re building a practice and you’re going to sell at $5, $6, $7, $8 million, $10 million, this is the perfect way to participate in a very advanced strategy, but not have to go through all the hassles of posting collateral every year and tying up any of your outside assets.

Now let’s talk about the actual mechanics, how the bank loan works, how the bank loan gets retired, and then how we set up these policies.

How does the bank loan work? It’s pretty simple. When you set up a policy – and let’s just keep using that $60,000 a year – you’re going to put in $60,000 and the bank is going to put in $60,000. That policy itself is all the collateral the bank is going to need because you put in $120,000 that first year and you only owe the bank $60,000. You don’t need to pledge any other outside stocks, any properties, any CDs or anything like that, because the policy is the collateral. Designed properly, that policy has enough value that it’s all the bank is going to need to see to just continue to fund.

Now, how that bank loan and gets retired, this is significant. After a certain period of time, depending on your age and the policy – like I said, everything is very unique to each individual person – the bank loan is going to be retired in a couple of different ways. The first is very simple. The accumulation and value in the policy, the growth of the policy over and above the rate being charged, is enough to just pay the bank loan off. That’s called an internal loan pay off or inside loan. Or outside funds, meaning cash, can be used to just pay the bank off. Then you own the policy specifically. When we get into the case study, that’s when we start to layer in how some of this could work specifically for each individual scenario. But think about this. You have got six, seven, eight, 10, 12, 15 years before retirement. And, at some point, you have an asset that you’re going to sell, either a building that your business is in, or the business itself, your practice if you’re, say, a physician that owns your own practice, and you’re going to have some kind of lump sum of money.

Tax Free Retirement Income

Now, do you remember when I said retirement is not a net worth problem? Retirement is an income problem? Well, a lot of the strategies that we’re talking about take years and years and years to get set up and grow and mature so that you can have steady income. Think about this. If you could set up this type of a future income stream, borrow half the money from the bank now thereby giving you a higher paycheck in retirement and higher retirement income, that’s a tax-free event when you borrow money. But you have some liquidation events, some type of sale or asset sale. Now what we can do is start setting you up for that tax-free income in retirement, knowing that that loan is going to be paid off from an event. Another way to say it is, “I’m going to sell my business in 10 years, and I want to retire. I don’t know what interest rates are going to be. I have no idea where I can put that money.” You know what? If the market’s really high and I don’t want to put it to work, then it just takes some of that unknown out of the equation because you know what your income is going to be and you know what the loan is going to be that you have to pay back.

Once we get into the case study, we’ll start to layer in some of those new nuances. But if you’re putting $60,000 a year into your policy, you can get a certain amount of income. If you’re borrowing $60,000 and putting in $60,000, the $60,000 you borrow you do not have to pay tax on. It’s a nontaxable event. You’re accumulating funds for retirement now using non-taxed, before-tax money, that you’re borrowing. And then when we pull it out, it’s not going to be taxed. It’s very interesting how it works. And hopefully as we get into the case study, you’ll get a sense of how that is.

Outside Funds

Outside funds: When we set up these policies, there are countless ways to do it, but we generally use one of two different ways. The 50-50 policy, where half is funded by the bank and half is funded by the by the client, removes that need for outside collateral, which is the biggest sticking point, and then we’re going to plan on paying that loan off from inside the policy, meaning the money is going to sit there and accumulate. At some point we’re going to say, “OK, bank, we’re taking a loan from the policy, we’re going to pay you off.” Effectively, we’re using the bank’s money with no additional out-of-pocket costs than if you just set up a regular non-premium finance policy, but we’re going to get that leverage using the cheap bank money right now.

And then, more common, we’re going to do that 50-50 policy just like above, but then we’re going to pay off the loan using outside funds, meaning the bank is going to be paid off. They’re going to release the policy. Now, you own it free and clear. We’re effectively supercharging the policy using funds from that liquidity event rather than having to put in a substantially larger premium up front or worrying about the collateral contribution in the early years. That’s really an effective way to set up a lifetime pension, tax-free income, for you. Knowing you’ve got an event coming down the line, let’s put more in today knowing that we have a source of funds to pay it off.

If we look at a conventional illustration versus a premium finance illustration, you’ll see pretty clearly how you can accumulate or set up future cash flow with the same amount of money out-of-pocket, again, if you know you have this liquidity event. So, let’s actually put some numbers to this and we’ll talk about it.

Remember, I said before, for a traditional policy, you have to have enough income to afford the premium and you have to be relatively healthy. In this conventional policy structure, we’ve got a 53-year-old male who’s in standard health for standard 53-year-olds. If you look at the first column, that’s the age. Now this is one page just for illustrative purposes out of a very long illustration that we would review specifically to you. Every year you go up and the policy goes up, we illustrated this where they would save or pay from today until they’re 62 $60,000 a year. Now, again, that’s after tax. They’ve got to earn money or take it from savings and put it in. There are no tax benefits on the front end of putting this premium in. In this particular case, we’re going to let that grow, add the money for 10 years, let it grow until age 70, and then we’re going to start pulling income out.

Tax Free All The Way

In this case, think about this, $60,000 a year for 10 years, then we let it cook until age 70, and then you could take out $90,000 a year. It’s tax free all the way up until you die, in the insurance business, they use the word maturity, but it’s just a nice way to say at death. And then what happens is, you have gotten all of this tax-free income out of the policy and then there is still a tax-free death benefit to leave to your beneficiaries. The loan gets paid back tax-free and the remained of the death benefit goes to your designated beneficiaries tax-free.

Now, we could just stop right here and say, “Hey, $5,000 a month for the next ten years while I’m working and then I can get out 150% or $90,000 a year for life tax-free.” It is a phenomenal way to have tax-free income in retirement with all these other benefits, including, if you have an early life expectancy, there’s a lot of tax-free cash that comes into the family. That’s really how insurance works. But in this particular policy, again, the way we design it, you could not put $61,000 in. We design it so the maximum amount of money is going into the growth and the minimal amount is going in to pay for that death benefit. That’s why the annual cost, once we get this policy funded, is relatively inexpensive. That’s what makes this work all these years, your premiums are being eaten up by the cost of insurance.  The bulk of the premium is going to growth. That’s unlike your conventional policy designed for protection only.

Compare and Contrast

Now, let’s compare and contrast it to a premium finance policy. A lot of it’s going to be exactly the same, except for the premium is $120,000 a year, $60,000 of it coming from the from the insurer, the client, and $60,000 coming from the bank. The $60,000 that’s coming from the bank, you don’t have to pay tax on. That’s just a loan that you’re taking, and it goes into the policy. The policy itself has an accumulation that satisfies the collateral the bank needs to see, and as you go through the funding of this and you get closer to retirement, you’ve got the money accumulated in there. And then, like we talked about before, at some point you’re going to have a liquidity event where you are going to pay the bank off, they’re going release this policy as collateral, just like if you have an apartment building and you pay the mortgage off. Now, all the income is yours. You don’t have any type of payment.

In this particular case, when the distributions started at age 70, it’s not $90,000 a year, it’s $180,000 a year.

So, what have we done? We’ve basically built a tax-free income source for you in retirement using money that you didn’t have access to until right before you retired. We’ve set this plan in motion using the bank’s money, knowing that you’d be able to pay that loan off at some point – either through an asset sale or practice sale, a business sale, or even just through some other savings – and now you have reliable tax-free income.

If something were to happen to you prior to normal life expectancy, same story – there would be a large tax-free bucket of money that goes to your family, that helps them because you’ve passed away before life expectancy. The loan is retired outside of the policy, but again, no additional collateral is needed.

Premium finance is going to take one of the most effective family office tools we have for bucket three, and that’s using that permanent life insurance to give you that income in retirement and increases that benefit using leverage. For the right situation with the right set of circumstances, it is extremely powerful. Increased income and retirement. Increased death benefit for beneficiaries. You’re basically tax arbitraging because you’re borrowing from the bank tax-free and letting that money grow in a tax-free environment, and then you’re taking it out tax-free when you do take the withdrawals. It’s really just a pre-designated place to invest some future event, some future liquidity event – whether that’s the sale of the practice or the building – but we’re setting that up today based on your current age and how we think that these policies are performing. It’s so specific, it’s so individual to everyone.

That’s a quick primer on insurance, how we use premium financing, how that can help you in retirement.


One question that came up is, “You said $60,000 will get $90,000 in income and then you have the $120,000 scenario. What if I was to just put in $120000 out-of-pocket?”

These insurance policies will go up to $50 million of death benefits, but the math still holds the same. If you can put in $10,000 a month, $120,00 a year, why not leverage that to $40,000 if you know you have a liquidity event? The math still works, and it just comes down to how much risk the insurance companies are willing to take. And like I said, we’ve got illustrations out where it’s a $50 million death benefit and that premium is way higher than that $60,000 or $120,000 a year.

Here’s another question: “Given the proposal for the government to have access to all of our accounts to monitor our funds, is this an alternative to keep them away?” I like how that’s worded.

If you’re following what’s going on in Washington, they’re basically saying, “The wealthy are getting away with murder. We want access to your bank accounts. We want to see funds going in and out. Then we want to match those up to your tax returns and make sure that everybody’s on a level playing field.” In this particular situation, because of when and how life insurance and the rules were designed, when these proposals come up and when they tweak of the tax code, you’ll notice insurance is rarely touched. As a matter of fact, the last time it was even touched I think it was 1987 when they changed some of these egregious abuses going on with insurance. From what I understand on these proposals, there’s no monitoring of the money moving in and out of policies because it’s loans. That’s not what they’re looking at. They’re looking at cash transactions going in and out of bank accounts. So, this could be a way that you can accumulate some funds, but again, it’s unknown.

I’ve said my whole career, I never want to make moves or changes to my situation based on potential tax law changes because they’re rarely exactly as advertised. Until that comes into code, we’re not going to start making recommendations based on that, but there is a concern. There are a lot of additional layers being proposed right now, which is just more paperwork that needs to be done.

And here is a final question: “I’ve got an account I’ve been funding for five plus years. Can I use that cash account instead of my bank?”

If you have a permanent life policy that’s building up accumulation, that you have access to, absolutely. That is exactly how we use that that first half when I talked about our strategy, where you’re building up that savings account, you can access this. It’s not specifically for retirement. So, that’s the answer to the question – this is not “locked up” until age 59 ½. This is just an asset that you own free and clear that you can access. Now, the one caveat is if we’re using the premium finance, the banks not going to let you get out all that cash until you pay them back. That’s why I was very specific about how we’re going to pay them back. But if you have a normal life, or any type of permanent policy, that’s building up accumulated value and you want to access some of that, yes you could pay it back, you could maintain that loan for as long as the policy solvent.

Thank you, everyone. If you have any additional question about premium financing or if you would like to schedule a meeting so learn how you could benefit from it, please call us at (772) 257-7888.