Borrowing from a bank or another financial institution as part of your estate planning can give you leverage that enables you to use your cash flow more effectively. One good example of this is premium financing life insurance.
Today’s relatively low interest rates mean premium financing is a practical option for many individuals who need to buy life insurance for estate planning or business reasons. When it is structured properly, this can be a solid method of managing cash flow and assets.
What Is Premium Financing Life Insurance?
The main benefit of this strategy is avoiding the need to liquidate assets to pay your life insurance premiums. Doing so could run the risk of you having to pay capital gains tax, and it would also likely result in you pulling money out of an investment that offers a higher return, thereby diminishing your net worth.
The proceeds of a life insurance policy can give your beneficiaries immediate tax-free liquidity to cover estate issues and expenses such as taxes without waiting for other assets from the estate to be available.
Although life insurance proceeds are usually factored by the IRS into the sum of your estate, premium financing life insurance is a financial strategy that can separate the benefits of your life insurance policy from your estate at large because you can set up an irrevocable life insurance trust that serves to remove the proceeds of the life insurance policy from the estate’s value.
Who Is Eligible For Premium Financing Life Insurance?
Underwriters generally look for the following characteristics when deciding who qualifies for premium financing life insurance:
- The insured has a high net worth of at least $5 million, although $2.5 million may be acceptable if the applicant is younger than 50
- The insured is under the age of 70
- The applicant is in good overall health
- The insured is a U.S. citizen or a permanent resident
- The applicant is wealthy but has limited access to cash or liquid assets
- The loan has reasonable fees and lending terms, all of which are fully disclosed in the supporting loan documentation
- The applicant can pledge additional collateral beyond the insurance contract itself
- Legal or financial counsel is involved to make sure the applicant is making an informed decision
- The applicant has clearly demonstrated their financial need and insurable interest
- The insured would qualify for the same amount of funds even without financing
- An exit strategy beyond the death benefit payoff has been demonstrated
- Interest on the loan will be paid at least annually rather than accrued
- The policy’s owner must be an individual, entity or trust currently residing within the U.S.
Collateral Requirements For Premium Financing Life Insurance
Lenders will generally require borrowers to secure their premium financing loan using collateral. Although the life insurance policy will technically secure the loan, lenders will still want collateral protection.
Some types of collateral liquidity they will accept include:
- Other existing life insurance policies
- Marketable securities such as stocks
- Letters of credit
- Cash or cash equivalents
Some lenders may also be willing to consider other cash values as a source of collateral.
How To Begin The Process
If you meet the premium financing life insurance qualifications, the next step is to meet with premium financing experts who can walk you through the process and ensure everything is set up in the best way to help you reach your financial objectives.
If this will be done through a trust, they will work with you to set up an irrevocable life insurance trust to own and manage the life insurance policy, often with help from an estate lawyer.
Once a plan has been tailored to suit your needs, it will be time to initiate the life insurance carrier underwriting and begin the formal bank loan application process.
Understanding The Risks
Every investment carries a risk, and premium financing life insurance is no exception. Working with a financial planner can help you find the best strategy to mitigate these risks.
One of the main risks to consider is the potential for interest rates to rise, which can impact loans that use a variable interest rate. It is also important to keep in mind that loans are renewable, and higher interest rates could change the structure requirements of the loan. This means there is a possibility that the policy’s cash value does not rise as fast as interest rates do.
There are also premium financing life insurance qualification risk to consider. When the loan is renewed, it will be necessary to requalify. If the lender reviews the collateral used to secure the loan and finds it to be insufficient, they may request that you provide additional collateral.
Reach Out To Vector Benefits
To learn more about premium financing life insurance and other strategies for maximizing wealth and find out whether you qualify, reach out to the professional brokers at Vector Benefits today.