Financing your life insurance premium is an advanced strategy where the life insurance purchaser borrows money to pay the premiums rather than using up current liquidity. The lender is later repaid the premiums from the death benefit. During times of low interest rates, this forecasting that the performance of the policy will outpace the interest of the loan is usually correct.
The insurance companies have constructed specific products for these financed plans to minimize outside collateral and maximize returns. This allows individuals and businesses to leverage current assets, maximizing returns via a predetermined cash flow.
This typically occurs in the following manner:
1. The purchaser determines his life insurance needs.
2. Several plans are researched until the purchaser determines which plan best fits his needs, accomplishes his goals and remains in his budget.
3. Formal bank and insurance carrier underwriting is initiated.
4. The policy is issued by the insurance carrier. It is strongly recommended that the strategy is initiated inside of an Irrevocable Life Insurance Trust (ILIT).
5. The purchaser provides collateral for the insurance loan – usually comprised of policy cash value. The lender pays the life insurance premiums to the insurance company.
6. The lender is repaid with the death benefits.
This strategy is not available to everyone. Premium financing is reserved for qualified clients, typically those with a net worth in excess of $5 million.
The obvious benefits of this strategy include:
- Reducing or eliminating the out-of-pocket cost of the life insurance.
- An opportunity to outperform the lending costs.
- Possibly allowing the purchaser to obtain more life insurance than if the client paid the premiums out of pocket resulting in more death benefits.
- Reducing or eliminating gift taxes.
With any wealth management strategy, it is important to consult with an experienced financial advisor in conjunction with your estate planning attorney. Contact Stouffer Legal At 443-470-3599 in the Greater Baltimore area for more information on wealth preservation strategies.