Successful estate planning involves being aware of the available strategies and finding out how to maximize those that work best for your financial position. One strategy many high net worth individuals have been taking advantage of to maximize their wealth is life insurance premium financing.
What Is Premium Financed Life Insurance?
Premium financed life insurance is a wealth maximization strategy wherein qualified borrowers access third-party financing to cover the high premiums on a life insurance policy that offers a considerable payout. It allows such individuals to avoid liquidating their assets.
Individuals with a high net worth often need life insurance coverage that provides death benefits of tens of millions of dollars to address their family inheritance, business succession and other estate planning needs. With premium financing, they can pay for the high premiums on such policies by borrowing funds from a third-party lender.
Generally speaking, this is an approach that is reserved for people whose net worth is in excess of $5 million and have significant collateral for obtaining loans.
Here is a look at some of the benefits of premium financed life insurance during estate planning.
Grow Your Assets In An Investment
The main benefit of this strategy is that it allows you to keep your assets invested. The premiums for a life insurance policy with payouts in the millions or tens of millions of dollars can be very expensive, amounting to $100,000 or more per year. If you do not have enough liquid assets to cover this, you would likely need to take the money out of your investment portfolio.
However, with premium financing, you can borrow money at a rate that is close to the benchmark short-term rate and keep the money that you would have spent on the premium in investments that will yield a greater return on your investment. In other words, you can keep your assets right where they are while still purchasing a life insurance policy with the type of coverage you seek.
Plan And Strategize For Estate Taxes
Many people use this strategy as a way to plan for their estate taxes. Insuring your life can protect your future heirs by providing money to pay estate taxes. The policy can be held separately from the rest of the estate in a trust, and its proceeds can be used to cover estate taxes and avoid liquidating assets.
Investments Are Tax Efficient
Premium financed life insurance is a tax-efficient approach because the funds that a trust borrows to pay for the yearly premiums and interest expenses are not subject to gift taxes. This helps avoid the need to sell assets to cover the cost of premiums, it allows you to avoid potentially triggering a taxable event.
Other Advantages Of Life Insurance
Here is a brief look at some more unique advantages of premium financed life insurance for wealthy families who have complex estate planning concerns.
- It may create a bigger pool of tax-free death benefits for those families that have estate liquidity concerns or estate equalization concerns. For example, it can be useful for extended families as well as closely held businesses where only selected heirs to participate in the business.
- It may help people who are in substandard health to acquire the coverage they need for proper estate planning because the favorable leverage in this approach sometimes outweighs the higher cost of the insurance that those in poor health typically pay.
- It can allow families that have estates that are not liquid to obtain the right amount of coverage by posting collateral and capitalizing their interest payments instead of paying massive premiums.
- With premium finance life insurance, paying interest on the premiums instead of paying the actual premiums can help individuals get the most out of limited gift tax exemptions and exclusions.
- It can create tax-free liquid assets upon the death of high net worth individuals whose growing estates have already exhausted their estate planning and gifting exemptions.
Keep in mind that if you die while you still owe money on the loan that you obtained for your life insurance policy, the death benefit of the policy will repay the outstanding premium finance loans, before the remainder of the payout will be passed to your beneficiaries as outlined in your estate plan. Therefore, it is important to ensure that the life insurance payout will be enough for your business or family needs once the loan has been paid off and seek a higher amount of life insurance, if necessary, to cover the loan’s repayment.
Learn More About Premium Financed Life Insurance
If you would like to learn more about premium financed life insurance and other strategies for maximizing and protecting your wealth, get in touch with the professionals at Vector Benefits to discuss your goals today.