Premium Financing
Leverage
In the wealth transfer markets, life insurance professionals encounter a number of challenges. The lack of liquid assets to meet wealth transfer costs is one challenge that, with proper planning, can be avoided. Large estates of wealthy individuals are generally subject to transfer and income taxes at death. After all non-insurance estate planning techniques have been employed, many wealthy individuals determine that life insurance can be an effective way to reduce the impact of transfer taxes. However, these wealthy individuals may be reluctant to convert high-performing investment portfolios or business assets into cash to purchase life insurance, creating a liquidity challenge. A premium financing plan can be designed specifically to create the necessary estate liquidity while preserving estate assets.
Have A Client In Mind?
Is Premium Financing A Solution? Let’s Talk About the Opportunity
CLIENT PROFILE
- Needs personal life insurance for estate planning or business needs.
- Has significant wealth including highly appreciated assets.
- The client finds traditional methods of paying for life insurance unappealing.
- He or She would like to purchase life insurance without liquidating other investments or otherwise changing their normal cash flow.
- Presently has trust-owned life insurance and would like to reduce annual gifting requirements or save having to pay possible gift taxes in order to purchase the life insurance their estate requires.
- Is interested in the most tax-efficient method of purchasing life insurance in order to benefit their heirs with little to no out-of-pocket outlay.
- Is willing to accept some risk in order to retain capital that can continue to be invested.
OPPORTUNITY
Premium financing offers your clients an alternative method of paying life insurance premiums. Rather than using or liquidating current assets, the funds needed to pay premiums are borrowed from a commercial lender so that the client’s investment portfolio or other assets can remain intact.
ADVANTAGES
Depending on the loan interest rate and the loan program, possibly reduced current net out-of-pocket cost for the needed life insurance coverage.
- Little or no impact on the current investment portfolio.
- Potentially favorable gift tax consequences for a number of years.
THINGS TO CONSIDER
- Available to trusts, partnerships, corporations, and on a limited basis, to individuals.
- Annual premiums are typically in excess of $100,000, and net worth is generally at least $5 million.
- The insurance policy is often owned by an Irrevocable Life Insurance Trust.
- Universal life, Indexed Universal, and Survivorship Universal life policies are the available life insurance products.
- The client will need to qualify annually for the loan. The lending institution could refuse to make an additional loan or demand repayments before a death claim is made.
- Must meet the collateral requirements of the lender.
- Should have a planned strategy to repay the debt in the future.
- Market fluctuations may affect loan interest rates and could make the strategy less attractive.
- Loan interest to purchase or carry life insurance is generally not income-tax-deductible.