Type I Plan: Fully Collateralized, Recourse Loan with interest payment due in Advance

The borrower pays the annual interest to the lender from his/her own funds. The borrower also, provides full collateral for the loaned amount of the premium. The policy cash surrender value is the principal form of collateral. To fully secure the loan if there is a shortfall in the early years of the transaction, then following types of collateral are also accepted:

• Cash - Deposited at Lending Institute
• Letter of Credit - Provided by Qualifying Institution
• Brokerage Accounts - Discounted based on Asset Mix
• Cash Surrender Value - Favorable Ratings of Insurance Carriers - Financial Strength

Type ii plan: fully collateralized, recourse loan with interest accumulated on the loan

Again, the borrower provides full collateral for the loan in advance. The policy cash surrender value is the principal form of collateral. However, the borrower does not pay the annual interest costs to the lender. Instead, the annual interest due is added to the loan principal. The interest rate offered by lender in this plan are usually higher. Depending on the interest rate environment during the transaction, the death benefit can be reduced dramatically by this accrued interest and the lender is repaid for the loan first. After this transaction the excess death benefit is passed on to the beneficiaries of the policy. The borrower has no cash flow needs and no out-of-pocket costs but has to manage the required collateral position annually as the interest accrues. This loan design can carry a greater financial risk, especially when the policy cash value performance or loan-interest projections do not meet expectations.