Life insurance plays a valuable role in helping to protect a person’s estate. Many people use these policies to provide their families with money after they pass away, but for high-net-worth individuals, it can be used to manage estate tax obligations and protect valuable assets. Here is a look at how premium financed life insurance works and what is involved in the process.
Why Is Premium Financed Life Insurance Used To Protect Assets?
Although individuals with a high net worth may be able to obtain a life insurance policy with a very generous death benefit, the premiums can be very high and may impact your liquidity significantly if you pay them out of pocket. In some cases, they may exceed $500,000 per year or more, which could be a significant amount to fund.
Therefore, many high-net-worth individuals turn to premium financed life insurance to secure wealth. This is a cost-effective strategy for paying for high-premium policies that protect your assets and help to create estate liquidity. Rather than liquidating your investments and paying capital gains taxes to cover premium payments or dip into your existing capital, premium financed life insurance plans enable you to keep your assets in place.
More and more people are recognizing the value of using insurance premium financing as a tax-efficient and effective way of using credit in wealth planning. It can be particularly beneficial in low-interest rate environments when you can lock your rate in for a period of several years.
One of the most beneficial aspects of this strategy is the tax benefit that comes from using life insurance proceeds to cover estate taxes.
How Is The Strategy Used?
People who purchase life insurance often intend to use it for estate planning, transitioning closely held business to the next generation, or gaining the peace of mind that comes from knowing they have prepared for the unexpected.
When premium financed life insurance is used to fund the premiums of these policies, there is no need to jeopardize your current cash flow or liquidate assets to do so. Here is a look at how the strategy protects assets in different circumstances.
Estate Planning
When borrowers use insurance premium financing for estate planning instead of their existing capital, they can instead invest their capital for a higher return on the investment of their choice. This avoids the need for liquidating assets such as collectibles, real estate, or investments at an unfavorable time.
Financing life insurance premiums instead of paying them out of pocket can also help estates with a high net worth transition their existing investment holdings and appreciated assets to future generations. Many of the insurance policies that serve as collateral for premium financing are owned by irrevocable life insurance trusts that the estate’s trustees manage. When the creditors of the trust pass away, the policy’s death benefits will be used to pay off the loan for premium financing and then dispersed to the individual’s beneficiaries to settle their estate taxes.
Succession Planning
In family-owned businesses and other types of businesses, premium financed life insurance policies can help transition ownership from siblings, generations, or relatives.
Buy-Sell Agreements
A life insurance death benefit can help transition a business’s ownership to heirs, key employees, or the estate’s beneficiaries. For example, the death benefits could be used to buy the deceased owner’s share of the business, and some insurance carriers even offer policies that are created with this purpose in mind. This approach allows current owners to avoid outside buyers and enjoy continuity in their daily business operations.
Major Holdings In Non-Liquid Assets
Businesses are not the only assets that premium financed life insurance can protect. It is also a good approach for transitioning the ownership of investment real estate, ranches, or farms. The death benefit can be used to buy out other siblings in the family who are not interested in property ownership. For example, the family’s patriarch or matriarch could purchase a life insurance policy that provides enough death benefit to purchase the real estate or farm from the uninterested siblings in an equitable and fair transaction.
Income Replacement And Liquidity
After the death of a loved one, many people experience stress on top of their grief as they worry about how they will meet expenses. In these cases, life insurance can serve as a valuable income replacement or liquidity source. When premium-financed life insurance is used for this purpose, loved ones can grow their net worth and maintain their current lifestyle with help from the policy’s death benefit.
Contact The Premium Financed Life Insurance Professionals
A life insurance policy can make a valuable contribution to your overall financial plan if you have a high net worth or a high annual income. Contact the experts at Vector Financial Group today to find out how we can help you meet your financial goals.
