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Family Office Mortgage

Technical brief

For your CPA and your attorney.

A technical brief on a jumbo mortgage paired with a premium-financed indexed universal life insurance policy: the contracts, the three debts, the model’s assumptions, the tax questions and the documents.

01The structure in one paragraph

Your client buys a home with a 20% down payment and a jumbo mortgage for the balance, interest only for 15 years and then amortizing over the remaining 15. At the same closing the client contributes about 30% of the purchase price to an indexed universal life policy on the client, a spouse or an adult child, and a bank lends further premiums under a separate premium-finance loan secured by a collateral assignment of the policy. The plan is to repay the bank around year 15 from policy values. From year 16 the policy owner takes loans or withdrawals, projected at a level that meets the amortizing mortgage payment. After the mortgage is repaid at the end of year 30, projected policy cash continues for the illustrated period, and a net death benefit remains for the beneficiaries. After closing, policy values, the bank loan and the collateral are reviewed against the plan every year.

The reference case

Illustration
Purchase price
$4,000,000
Down payment
$800,000, 20% of the price
Mortgage
$3,200,000 at an assumed 6.1%
Policy contribution
$1,200,000, 30% of the price
Payment, years 1 to 15
$16,266.67 a month, interest only
Payment, years 16 to 30
$27,176.61 a month
Projected policy cash
$370,000 a year, years 16 to 62
Quoted remaining death benefit
$2,600,000

The mortgage figures are calculated. Projected policy cash and the remaining death benefit are quoted from the program’s reference illustration; your client’s proposal replaces them with a carrier illustration for the person insured. See the evidence table below.

02The parties

The contracts

The buyer
ContractThe purchase contract, the mortgage note and the security instrument on the home.
To establishUsually also the policy owner and the premium-finance borrower, directly or through a trust. Confirm which person or entity signs each document.
The mortgage lender
ContractThe note and the security instrument. Possibly an assignment of, or a payment direction over, the policy or its distributions.
To establishA third-party lender: your client’s own, or one we introduce. It must be willing to write 15 years of interest only inside a 30-year term. No lender is named on this site. It is identified in each case.
The insurance carrier
ContractThe policy: an indexed universal life contract, with its illustration and its in-force ledgers.
To establishIdentified in each case, with the product and the policy form. No carrier sponsors or endorses the program.
The insured, the owner and the beneficiary
ContractThree roles under the one policy.
To establishThey can be three different people. The owner controls loans, withdrawals and beneficiary designations. A trust can be the owner, the beneficiary or both, and does not by itself settle tax treatment, insurability or access to loans.
The premium-finance bank
ContractA loan agreement and a collateral assignment of the policy, with any further collateral the bank requires.
To establishIt funds premiums to the carrier, not cash to your client. Benchmark, spread, reset, renewal, recourse and release are terms of that agreement.
Kent Chesley and Paul Finestone
RoleCoordination. The program is not the lender, the carrier or the bank, and it issues none of the contracts above.
To establishKent Chesley: real estate advisory. Paul Finestone: policy design and financing.

03The borrowing

The three debts

Keep all three visible in every schedule you are shown. Repaying one does not retire the others.

  1. I

    The mortgage

    Owed to
    The mortgage lender.
    Secured by
    The home.
    The plan
    $3,200,000 at purchase. The balance is unchanged through year 15 and is repaid at the end of year 30.
    In our figures
    Modeled. Every payment and balance is calculated.
  2. II

    The premium-finance loan

    Owed to
    A bank.
    Secured by
    A collateral assignment of the policy, and any additional collateral the bank requires.
    The plan
    Planned to be repaid around year 15. The amount, the schedule of advances and the source of repayment are set in each case.
    In our figures
    Shown in the financing term sheet for each case. The base case assumes no interest and no repayment from the client’s own cash.
  3. III

    Policy loans

    Owed to
    The carrier.
    Secured by
    The policy’s own value. They are settled from the surrender value or the death benefit.
    The plan
    May be used to repay the bank and to provide the cash from year 16. They can remain after the bank is repaid, and after the mortgage is repaid.
    In our figures
    Shown in the carrier illustration for each case.

The order of the lenders’ claims

On the home, the mortgage lender is the secured creditor. On the policy, policy loans are settled inside the contract: surrender values and death proceeds are paid net of them. A premium-finance bank will typically expect a first collateral assignment of the policy. Where the mortgage lender also takes an interest in the policy or its distributions, the assignments set the order between it and the bank.

Which lender ranks first on the policy, what each may do on a default, and what is released when the bank is repaid must be reconciled in the documents for each case. Ask for the assignments themselves, and for the intercreditor terms if there are any.

Ask also for the policy-loan balance at the bank’s planned exit around year 15.

04The arithmetic

The model’s assumptions

The model is a household cash-flow comparison. It calculates the mortgage; policy and bank-loan figures come from the carrier illustration and the financing term sheet.

It assumes

  • One mortgage rate, 6.1%, in both cases and for all 30 years. It is an assumption, not a rate offer.
  • Traditional case: 360 level payments of principal and interest. Program: 180 interest-only payments, then the full principal amortized over 180.
  • The policy contribution is paid once, at purchase. No later premiums, no financing interest paid in cash, no collateral calls and no cash from the client when the bank is repaid.
  • Projected policy cash is an input, not an output: $370,000 a year for 47 years, years 16 to 62, taken as available after the bank is repaid and after the policy’s continuing obligations.
  • Annual policy cash is treated as available when each monthly mortgage payment falls due.
  • The insured is living through year 62. That is a condition of the scenario, not a mortality forecast.
  • Nothing is invested in either case. The baseline is a traditional mortgage with no account alongside it, and money kept or saved earns nothing.

Not included

  • The policy itself: crediting, charges, cash values, loan balances and lapse testing.
  • The premium-finance loan: advances, interest, collateral and the accounting of its repayment.
  • Property taxes, home insurance and maintenance.
  • Closing costs and advisory fees.
  • Tax effects of any kind. No deduction is assumed and no tax saving is added.
  • Home appreciation, reinvestment and the time value of money. All amounts are nominal.

What it produces. Total personal contributions of $4,928,000 against $7,781,060, and a nominal cash surplus of $7,570,210.71 through year 62: projected cash received less personal contributions, undiscounted, across all 47 projected annual amounts. The quoted remaining death benefit is shown on its own line.

How the mortgage figures are calculated
  • Monthly rate. r is the annual note rate divided by 12.
  • Level payment. P × r ÷ (1 − (1 + r)−n), with n = 360 for the traditional loan and n = 180 for the program in years 16 to 30.
  • Interest-only payment. P × r.
  • Reference results. With P = $3,200,000 at 6.1%: $19,391.83 traditional, $16,266.67 interest only, $27,176.61 in the later years.
  • Rounding. Totals use unrounded payments. Displayed payments are rounded to the cent.

05Evidence status

Where each input comes from.

Some inputs are calculated, some are assumed and some are quoted.

Purchase price
$4,000,000
Agreed example
Down payment
20%, $800,000
20% guideline, same in both cases
Policy contribution
30%, $1,200,000
30% guideline from the program’s originator
Mortgage rate
6.1%
Assumed, the same in both cases. Not a rate offer.
Interest-only period
15 years
Program design: 15 years interest only, then 15 years of principal and interest
Projected policy cash
$370,000 a year
Quoted projection ($370,000 a year on a $1.2M contribution), scaled to the policy contribution. Not derived by this model and not guaranteed.
Number of annual amounts
47
Quoted: 47 annual distributions, years 16 through 62
Remaining death benefit
$2,600,000
Quoted remaining death benefit; the carrier illustration sets the net figure

Every mortgage figure on this site is calculated from the inputs above. Projected policy cash, the number of annual amounts and the remaining death benefit are quoted from the program’s reference illustration, and the site labels them as an illustration. Your client’s proposal replaces them with a carrier illustration for the person insured.

06To settle for your client

Tax questions

Our figures assume no tax benefit of any kind, and we do not give tax or legal advice.

  1. 01

    Policy qualification

    Does the policy, as designed and funded, meet the definition of life insurance under section 7702 for the whole illustrated period? Who tests it each year?

  2. 02

    Modified endowment contract status

    Is the policy a modified endowment contract under section 7702A at issue? Could a later change, such as a reduction in death benefit or a change in funding, make it one? If it did, how would the loans the plan relies on be taxed?

  3. 03

    Treatment of loans and withdrawals

    From year 16, is cash taken as withdrawals to basis, as policy loans, or both, and in what order? On what basis are the policy loans respected as debt for this owner? Is interest on any of the three debts deductible to your client, and has any figure you have been shown assumed that it is?

  4. 04

    Surrender

    On a surrender with loans outstanding, what income would be recognized, and in which year?

  5. 05

    Ownership and the estate

    Who should own the policy: the insured, a spouse, or an irrevocable life insurance trust? Under the proposed ownership, are the proceeds included in the insured’s estate? If a trust owns the policy, can it be the premium-finance borrower, who guarantees that loan, and can policy cash still reach the mortgage lender?

  6. 06

    Gift treatment of contributions

    If a trust owns the policy, how is the initial contribution characterized: a gift, a loan to the trust, or something else? What of later amounts, such as collateral pledged by your client, interest paid on the trust’s behalf, or mortgage payments made from trust-owned policy cash for the homeowner’s benefit?

  7. 07

    Three parties to one policy

    Where the insured, the owner and the beneficiary are three different people, could the death proceeds be treated as a gift from the owner to the beneficiary? Does anything in the assignments disturb the exclusion of death proceeds from income?

07To request

Documents

  1. I

    The carrier illustration

    For the actual insured, with guaranteed and non-guaranteed columns. Carrier, product and form. The insured’s age and underwriting class. Issue date, owner and beneficiary. Premium amounts and dates, face amount and death benefit option. And the proposed access for every year from 16 to the end of the illustration.

  2. II

    The financing term sheet

    The financing agreement and the annual schedule of advances and interest. Benchmark, spread, reset, any floor, renewal, recourse, collateral requirements and release terms. The source of the funds that repay the bank, and any client cash required before, at and after.

  3. III

    The mortgage term sheet

    Principal, down payment, interest-only term, final maturity, rate period and resets, how the later payment is calculated, fees, prepayment terms and any refinance requirement. And the lender’s rights in the policy or its distributions.

IV

The annual ledger

One row for each policy year, and a separate row for each funding or exit event. Policy and mortgage start dates stated. Timing within the year shown wherever it affects mortgage coverage.

Client cash
Down payment, client premiums, personally paid finance interest, service costs, extra deposits and other required cash.
Premiums to insurer
Client-funded and bank-funded premium amounts separately, with dates.
Premium-finance loan
Beginning balance, advances, interest charged, interest paid, interest capitalized, repayments and ending balance.
Bank collateral
Eligible collateral, required coverage, additional pledge or cash demand, and released collateral.
Policy values
Beginning and ending accumulation value, credited amounts, policy charges, surrender charges and available surrender value.
Policy loans
Beginning balance, advances, interest charged, interest paid or added, repayments and ending balance.
Bank exit transaction
Amount paid, recipient, source of funds, and the policy values and debt immediately afterward.
Owner cash access
Withdrawal or loan type, gross amount, deductions, restricted amount and net spendable cash.
Mortgage
Payment due, principal, interest, balance, and whether paid by the household or from policy cash.
Beneficiary proceeds
Gross death benefit, policy debt, accrued interest, other claims and the resulting net benefit.
Policy status
In force, projected lapse date, the conditions of any guarantee relied on, and any additional funding required.
Five accounting rules for the ledger
  1. Borrowed premiums are not income to the homeowner. Gross policy value is not added to a figure that already includes it.
  2. The bank’s repayment is not deducted twice. If the projected cash is already net of it, leave it. If it is not, the projection has to be rebuilt.
  3. A collateral pledge is restricted liquidity. It becomes cash spent only when cash is actually required or an asset is used to meet an obligation.
  4. An unknown balance stays marked unknown. A blank is never a zero.
  5. Policy cash value is not added to a death benefit unless the contract actually pays both.

08How each case is tested

Every case is tested before it is proposed.

Each case is run through simulations across many market paths, on a conservative profile, alongside the carrier’s guaranteed and illustrated values. These are the conditions tested, and what each test establishes.

Lower or uneven policy credits
That the bank is still repaid as planned and the policy still carries the mortgage, and how much margin remains.
Higher financing or policy-loan rates
The effect on the bank’s exit and on the cash the policy sustains.
Loan renewal and collateral
The collateral the bank could require, when, and which of the client’s assets would be pledged rather than sold.
Mortgage repricing or a different amortization
The revised scheduled payment, and policy coverage of it in the same years.
Annual policy cash below plan
How far policy cash can fall before the household contributes, and the margin at each level.
A sale of the home in years 5, 10, 15 or 20
Policy value and the mortgage and finance payoff at each date, and how the policy continues on its own.
Death of the insured at earlier ages
The net payment to the beneficiary beside the mortgage balance, year by year.

The margin in the reference case

At the assumed mortgage terms, the payments in years 16 to 30 need $326,119.29 a year. Projected policy cash stands 13.5% above that.

As illustrated: $370,000 a year
Paid in full, $43,880.71 left
10% lower: $333,000 a year
Paid in full, $6,880.71 left

How the simulations work

For your client’s case, ask us to walk you through what was simulated: the method, the input distributions, the costs, the borrowing assumptions and the sample size, and what counts as success in each test.

The figures are case-specific, which is why they are shown in the proposal and not on a public page.

09Direct lines

Talk to us

How the risks are managedThe glossary

By qualification

Find out if it is open to you.

Three ranges tell you where you stand against the published criteria. If you meet them, Kent Chesley will speak with you personally.

Prefer to talk? Call him directly at 949-293-8686.

Three ranges. Your answer appears here, before you give a name.