Kai-Zen is a strategy that helps you maintain your current lifestyle in the event of a chronic illness, premature death, or an inability to sufficiently save for retirement.  Protecting your earnings is critical to insuring your ability to save for retirement. Due to limitations, traditional retirement plans are typically insufficient for high-income earners. If you want to maintain your lifestyle in retirement, you need a proactive strategy that puts more money toward protecting your future income without putting a drain on your current finances.

Kai-Zen is the ONLY strategy that uses leverage to help you acquire more of the benefits you need to financially protect you and your family. Its unique fusion of financing and life insurance offers you more protections and the potential to earn more for retirement than you could obtain without leverage.

The Kai-Zen strategy is simple. Premiums are jointly funded by bank financing and the participant or employer. The bank financing provides the majority of the total contribution to the plan, and the life insurance policy itself is the full security for the loan.  This strategy is specifically designed so that the participant is not required to go through financial underwriting or sign any loan documents.  As an additional protection, Kai-Zen’s structure is also set up to protect your benefits in the event of employer bankruptcy.

By using bank financing, the Kai-Zen strategy allows you to realize benefits beyond your expectations while keeping contributions within your means.

This concept is not much different than financing a house – you use a mortgage to leverage the assets you have on hand to buy more house than you could afford on your own.  Money is borrowed to buy more house, or with Kai-Zen, more benefits.  With Kai-Zen, you are buying a life insurance policy with a larger death benefit, more living benefit protections, and the potential for more cash accumulation without the risk of losses (due to declines in a market index).

To read more, download our Kai-Zen brochure, which varies by carrier: National Life or Allianz.

• According to Retirement Success, How much you have to spend in retirement is mostly determined by how much you save, not where you invest it!
• 90% of all households earning over $200,000 are chronically under saving for retirement in order to preserve their current quality of life.
• Average savings rate in the US is 6.5%. Top 10% of income earners save on average 9% to 12%.
• Required savings rate to maintain lifestyle for a 45-year-old is estimated to be roughly 35%.
• Among current retirees, 43% said they had to retire earlier than they'd hoped, typically due to either health issues or losing their job, according to a report from the Employee Benefit Research Institute.
• 66.5% of all bankruptcies filed due to health-care costs. Why: High cost of care and/or time off work.
• Majority of Americans are one medical emergency away from financial ruin.
• Fixed life insurance products are safer to lend to than bonds.
• One of the most significant advantages of life insurance products is their ability to accumulate cash value on a tax-deferred basis.
• IUL products capture most of the upside of the market and none of the downside.
• IULs and similar cash value life insurance products allow you to withdraw tax-free policy loans in the event of critical illness, critical injury, chronic illness, and terminal illness.
• IULs and similar cash value life insurance products allow you to withdraw cash tax-free from the policy to supplement your retirement income.
• Using leverage to buy life insurance is a common practice because it allows individuals to afford more of the protections they need for their financial futures.  When designed correctly, cash values in the life insurance policy eventually exceed the cost of borrowing.

• What is Premium Finance

  What is Premium Finance (or Financed Insurance)?

  
   
  At its simplest level, premium finance is using lender money to pay for life insurance premiums instead of using your own cash. The concept has been in use since the 1960’s.
  What are the benefits of premium finance?
  a) Saves cash flow vs. using your own money
  b) Avoids opportunity cost (lost earnings or taking a working asset, liquidating it and using the money to pay for premiums)
  c) In estate planning applications it should reduce gift taxes (triggered when paying money into the ILIT)
  Estate Planning Applications
  • Estate planning for those with a net worth of more than $10m
  • Succession planning for family businesses
  • Creating liquidity or augmenting philanthropic gifts from wealthy families
  • Creating new capital inside existing family trusts that are being depleted over time by the needs of the beneficiaries e.g large established family trusts
• Business Applications
  • Executive Benefit solutions
  • Living Keyman/ Buy Sell solutions (where death is not required)
  • Informal funding of nonqualified plans
  • Informal funding of ESOP buyback provisions 

• Premium Finance: Important Considerations

  
  Premium finance is no different from regular financing in that there is always some risk. This not a problem unless there is a lack of understanding.   After all, it is important to remember there are risks when a client does not buy the insurance they need. So the issue is less about whether there is risk, and more about how much risk and how much reward. If any agent tells you that the program is “free insurance or risk-free,” they are clearly very misinformed or overly optimistic in their selling approach.
  Questions to ask:
  • Does the design last to age 100+ and still save money?
  • Does the design have realistic assumptions? (Look at the underlying interest rate assumption on both the lender loan and the policy return)
  • Is there any meaningful testing to ensure the design will not fail? (Please note:  The historical average for LIBOR is 4.6%.  The bank will add a profit margin onto the LIBOR rate. Make sure the loan breaks out interest rate assumptions and bank profit margin. Also, confirm that the interest rate forecast is based on a credible source and not purely hypothetical.)
• Policy performance
  Being realistic, assume that economic conditions will not remain constant throughout the term of the policy. Look for stress tests that show how the design would perform during an economic downturn. The design should account for economic uncertainty, although most premium finance designs do not. OakTree conducts stress testing on all designs.
  Client Durability
  If a client cannot tolerate the additional collateral or interest requirements needed to recover through harsh economic circumstances, then the design should be modified in a manner that is acceptable to the client’s needs. They can only make this determination if they are shown stress tests.

Historically, leverage has been a financial strategy used exclusively by the ultra-wealthy.  With leverage, capital is borrowed for an investment with the expectation that the return on investment will be greater than the cost of the loan.

EXAMPLES OF LEVERAGE

• Using a loan to buy a bigger house
• Purchasing an investment property to rent or flip
• Expanding a business using a loan without tying up your cash flow

Put another way, you purchase items today using loans with the hope that they will appreciate in value.  This also allows you to enjoy more, sooner, and for a longer period of time.  While most people use leverage to expand a business, finance a bigger house, or purchase an investment property, OakTree uses the same concept but with life insurance.  Using leverage maximizes the growth potential in your policy so that you can enjoy more protections. When designed correctly, cash accumulation in the policy eventually exceeds the cost of borrowing.

Quick Overview

OakTree and the designers of Kai-Zen conducts “stress testing” on all of our designs before making them available to the market. When stress testing, potential designs undergo simulations of The Great Depression and the high interest 80's, two of the country's harshest economic time periods. We use this testing to educate clients so that they can anticipate potential changes in the market. Most importantly, this rigorous process guides the selection of optimal products and loan terms, allowing NIW to deliver designs of the highest quality and durability.

Stress testing was not something that was done before NIW entered the market.  In fact, before, insurance companies used very little testing at all to ensure the safety of their designs.  When Kai-Zen was created, we wanted to ensure the reliability and quality of our designs and so stress testing has been done on every strategy.  Stress testing is now becoming a more common practice for insurance companies.

A Detailed Look at Stress Testing

The standard insurance illustration and our proposal show the projected collateral based on the lender’s LIBOR projections. While that is the forecast that the lenders see moving forward, it is their “best efforts” forecast and NIW wants to ensure that the client is prepared for economic fluctuations that would fall outside of these projections. This gives the client a good understanding of what their risk could look like given different circumstances.

Historically, the S&P will return 0% in 30% of years, which is something the insurance illustrations do not show, and why it is important to show a stressed scenario to every client. If the client is shown extreme stress testing (which is a very low probability event), they will have managed expectations in the event of low performance. In addition, the fact that the design still recovers gives the client increased confidence in the performance of the design and reinforces that anything less extreme is not a cause for concern.

The two worst time periods that would affect these financed insurance designs in the US economy’s history, are the Great Depression and the 1980s high interest rate environment. These two scenarios test different aspects of a financed life insurance plan. The Great Depression tests an insurance carrier’s policy, as 7 out of the first 10 years had a 0% policy credit, when the impact of contract costs are greatest. The 1980s covers the worst interest rate period in US history, and also very slow bond yield response inside of the product itself.

We’ve found that a client’s biggest concern about financed plans is the required collateral, which is why we show whichever stress test has the biggest impact on the amount they need to post. By doing this, the client can be comforted in knowing that they will most likely have the appropriate collateral the design will need to not only survive, but also to achieve the plan’s objective. We do this because we want to set expectations for the client about what they will get and what it will cost them to get them there. The benefit of a Kai-Zen financed design is that even in stressed conditions the collateral is frequently lower than the cumulative out of pocket would have been if they purchased life insurance conventionally. By showing the stressed condition compared to the conventional cost of purchasing equivalent insurance, the client gets a better understanding of the value of this financed plan. Bottom line, if the client merely needs to post more collateral (which is returned), then the value proposition of this plan is both clear and compelling.

Lastly, the stress tests provide another valuable benefit: they weed out weak design and weak product. Most illustrations look good on paper, but they don’t show the full picture of the risk factors involved. If the proper procedures are not put in place, risk factors are not controlled, and client expectations are not managed, plans that look good on paper will ultimately fail. Stress testing allows OakTree and the client to reject designs that are not suited for the client’s long-term strategy and choose the products and designs that work best for their financial goals and risk comfort level.