What is Premium Financed Life Insurance
Life insurance premium financing involves taking out a loan from a bank or lender to pay for a policy’s premiums. As with other loans, the lender charges interest, and the borrower (the insured, in this case) repays the loan in regular installments until the debt is satisfied or the insured passes away, in which case the balance is typically paid off with insurance proceeds.
Capital Maximization for Life Insurance may be useful to high net worth individuals who don’t want to liquidate assets to pay for costly life insurance premiums outright.
Life insurance can provide very attractive financial protection and accumulation
benefits, such as:
● An income tax-free death benefit,
● Tax-deferred cash value growth,
● Tax-free access to cash value,
● Creditor protection
(depending on ownership and applicable state law)
A large Life Insurance policy may require that lucrative assets be liquidated or cash flow be redirected to fund the premiums which many affluent clients may find unattractive.
Premium financing can be an alternative method of funding life insurance premiums that involves borrowing the amounts needed to pay the premiums from a commercial lender as opposed to paying them out of pocket.
The initial cost, then, becomes only the loan interest which can be paid in cash or accrued, in some instances. The loan is collateralized primarily by the policy’s cash value with any shortfall covered by pledging personal assets.
What is a Capital Maximization for Life Insurance?
Maximizing Capital for Life Insurance entails financing policy premiums through a third party (bank) loan that suit the client’s unique circumstances and objectives.
This strategy provides qualified individuals with Life Insurance while
Reducing immediate out-of-pocket cost
Leverages the policy’s internal value
Liberates capital for other opportunities
Mitigates gift tax exposure (trust-owned policies)
Increases policy death benefit and IRR on cash value
Above and beyond personal Estate Planning, Capital Maximization and Premium Financing can also be used for many Business Planning initiatives such as Key Person Insurance, Buy-Sell Agreements, Differed Compensation Packages, and more
Over time, old policies can lose their effectiveness and more effective products can come on to the market. We can review your client’s existing policies, identify underperformance and weakness, and suggest ways of improving the portfolio’s value. This will ensure that your client’s existing policies perform in line with expectations.
An underperforming policy can be replaced; but in many cases an existing policy may be restructured to make it more efficient by:
discounting your out-of-pocket cash flow
increasing your overall death benefit
creating a line of credit to free up assets
What are the benefits of Premium Finance?
Paying loan interest and pledging collateral instead of paying premiums can help to reduce the cost of the strategy or leverage it for more efficient results, such as an increased rate of return on cash value accumulation and/or net death benefit. If the policy is owned by an Irrevocable Life Insurance Trust (an "ILIT") where gifting is needed, the gift is measured by the annual loan interest paid by the grantor as opposed to the actual premium, thus helping to reduce or eliminate gift tax exposure associated with large premium requirements.
Additionally, the need to liquidate, or redirect cash flow from lucrative investments to fund premiums can be reduced or eliminated, which could mitigate transaction costs such as capital gain taxes.
Lastly, securing Life Insurance while keeping capital deployed towards existing investments (i.e. maximizing "retained assets"), can help preserve and grow wealth with reduced opportunity cost assuming the rate of return on such investments or retained assets exceeds the cost of borrowing.
Premium Finance Tools
The following carrier marketing pieces give an overview of their Premium Finance programs, parameters and possible guidelines.