Why pay out of pocket? You shouldn’t.
The benefits of financing your life insurance premiums is a powerful option. Call Now.
Who is premium financing for?
Premium financing isn’t for everyone. This type of financial plan is for those who have a net worth of over $5 million and at least $500,000 in liquid net worth. They also need to be making $400,000 a year annually at a minimum. Applicants usually have a need for life coverage for estate taxes, liquidity, and supplemental income. They are also looking to reduce gift tax exposure, understand the financial risk involved, and have experience with financing.
Below, we’ve included some of the risks involved with premium financing:
- Policy performance risk
- Policy lapse risk
- Gift tax risk
- Interest risk
- Loan qualification risk
- Carrier risk
- Collateral risk
Why do it?
There are multiple reasons why people invest in premium financing. Here are a few of those reasons:
- Reducing the opportunity cost of your funds- your current cash flow may be committed to other expenses.
- Reduces your liquidity needs, especially helpful if your assets are not readily convertible to cash.
- Paying a small portion of the premium via interest (and posting collateral) as opposed to paying the full premium.
- Positive arbitrage between the interest on the loan and the return on the life insurance cash value.
- Gift the interest instead of gifting the principal.
- Protecting your estate utilizing leverage (other peoples money).
The loan itself
- 10-year commitment from the bank
- Fixed interest rate
- Limited or no personal guarantee
- Collateral – cash, CD’s, marketable securities, letter of credit, Cash Value’s of non-MEC life insurance policies.
- Trusted adviser
- Life insurance company
- Estate attorney
- Keep it open and take income
- Pay from cash value
- Side fund
- Quarterly performance reviews
- Annual comprehensive reviews
- Underwriting a life insurance policy with the insurance carrier.
- Introducing the client to a financial institution that will underwrite the loan
- Establishing an irrevocable life insurance trust.