• Michael J. Boho Jr., CSA, LTCP, CLTC

Why Start a Conversation on LS³

Many companies employ the power of leverage, borrowing from a bank or other financial institution in managing their business operations. Used properly and responsibly, leverage allows for cash flow to be used more effectively, usually invested back in the business to grow and expand.

Skilled executives understand the full benefits and potential risks of borrowing. Potential investors also look at debt ratios to see how much of a company’s assets are being financed when analyzing whether to invest in them. But, when borrowing is done improperly, it can cause additional stress on a company’s financial footing.

Financially savvy individuals may also employ leverage in managing their personal finances. Some choose to finance a major purchase, such as a car, given the low interest rates on a loan. They prefer the arbitrage, believing they can earn a higher rate of return on their money compared to the amount being charged to finance the purchase. Financial advisors at Strategic Risk Management present the use of LS³ to business owners and qualified clients as an option for funding:

  • Life insurance purchases

  • Business transition planning

  • Personal retirement

  • Tax reduction plans

Used properly, it can be an effective and suitable tool to build a retirement asset and a perfect tool to transition a business.

However, one must know the potential risks of using such a technique as well. Today, considering the relatively low interest rate environment, LS³ may be a practical and appropriate way to assist individuals who have a legitimate need to purchase life insurance for estate planning or business needs. Structured properly, it provides a flexible alternative way to manage assets and cash flow. Today many programs are constructed and designed in ways that are more acceptable to insurers and re-insurers alike. We look for several characteristics that indicate a more acceptable and favorable case. These qualities include:

  • An insured that is financially savvy with a high net worth.

  • Wealthy, but limited cash or liquid assets.

  • Insured is generally under age 70.

  • A clearly demonstrated insurable interest and financial need.

  • An amount the insured would qualify for even if financing were not involved.

  • Additional collateral being pledged besides the insurance contract alone.

  • Involvement by outside legal or financial counsel.

  • A demonstrated exit strategy besides death benefit payoff.

  • Reasonable lending terms and fees that are fully disclosed.

  • Loan interest to be paid at least monthly and not accrued.

LS³ is a powerful tool for the business owner and high net worth individual. Let’s work together to see how it can help you and your clients. Reach out today to learn more.