Over the years, there has been a lot of life insurance premium that has been paid or sold with the use of Premium Financing. If used properly, and if the case meets certain parameters, the idea of Premium Finance can be useful and effective. The problem with the concept is that like a lot of ideas that can generate large premiums there is a tendency to try to use it in cases that really don’t fit. We have the resources to help you with these types of cases. But first you must understand the where, when and how of the concept and when to use it.
Simply put, premium financing is an innovative alternative for funding life insurance premiums. Financing arrangements are designed to even further leverage insurance premium dollars while providing the needed insurance coverage at a more economical cost.
Reduce current out-of-pocket cost for life insurance coverage
Minimal or no impact on current investments
Potentially favorable gift tax consequences
Provide liquidity in a large illiquid estate
Deferring or avoiding capital gains taxes payable from liquidating appreciated assets
Premium Financing enables individuals with a high net worth to purchase life insurance without depleting other assets or changing their normal cash flow. They are able to protect net worth, continue business development, and pass their financial legacy to future generations without altering other financial objectives.
Not all can participate in such a strategy. Here are some parameters for those who would qualify for such a plan. They must:
Have a need for life insurance
Have a net worth of $5,000,000 +
Have an annual income of at least $200,000 +
Have sufficient assets to pledge as collateral for a Letter of Credit (generally to pay the difference between the surrender amount of the policy and the outstanding loan.)
Based on underwriting can qualify for a life insurance policy
Consign to a minimum of $1,000,000 in loans to provide premium
Policy surrender value is the main source of collateral for loans
The amount of collateral required varies between the various lending strategies
Collateral needs are most commonly covered by a Letter of Credit
Letter of Credit must be provided for AA rated banks
Other items used for collateral.
Alternative Plan Designs:
Accruing Interest – The client does not pay the interest of the loan. Rather, the annual interest due is added to the loan principal and paid out of the policy death benefit at the insured’s death. Thus, causing the amount of the loan to be greater.
Interest paid – The client pays the interest of the loan with their own funds. The loan is for only the amount of the premiums to be paid
Rollouts – Taking a large enough loan to over fund the insurance policy so that in time the client can take a loan out of the insurance policy to pay off the entire loan.
By working through one of these cases you can grasp all the complexities and variables involved. We work with insurance companies and credit facilities that are experienced in all alternatives, so that your various needs are met. Our resources include plan designers experienced in working with lawyers and accountants, to help you understand all of the plan designs. When combining all of these financial aspects, advisors provide clarity to clients so they can feel comfortable and confident in how their objectives will be achieved.
Now aren’t you glad you asked?
Thanks for clearly defining the what, where, why and how of a very effective strategy. do you recomend a carrier or lender?
Hey Jeff, Nice job on the premium financing article. Very educational and concise. Thanks, Doug Fisher