A Perfect Storm Opportunity
Using Premium Financing for Life Insurance
Doug McClure, President of Global Investment Strategies, is not a meterologist. However, he can predict when a perfect storm can produce a really good outcome.
Doug’s current forecast is about two trends coming together and creating a perfect storm opporunity for high net worth individuals and businesses needing high value life insurance.
Trend One – lenders are charging very low interest rates.
Trend Two – insurance carriers are offering higher long term crediting rates.
These two factors, occuring simultaneously, creates an attractive arbitrage for individuals and business to finance premiums for high value life insurance policies.
Bottom Line Benefit – One can acquire a high value asset that pays tax free benefits, with an acquisition cost of 5%-10% of the asset’s value.
The policy is an asset that grows in value. The policy value repays the loan principal. The borrower pays interest usually at only 1%-2% over LIBOR.
Why Consider Premium Financed Life Insurance?
In today’s robust economic environment, well managed assets are appreciating at a very strong rate. While a high net worth individual or business may have sufficient assets that could be liquidated to fund policy premiums, there may be reluctance to sell off assets that are growing or generating income.
Premium Financed Life Insurance works well for people who:
- Have a need for personal life insurance for estate planning or business needs;
- Have significant wealth tied up in highly appreciated assets;
- Traditional methods of paying for life insurance is not appealing;
- Want life insurance without liquidating other investments or otherwise changing normal cash flow;
- Presently has trust owned life insurance and would like to reduce annual gifting requirements or save having to pay possible gift taxes in order to purchase the life insurance their estate requires;
- Is interested in the most tax efficient method of purchasing life insurance in order to benefit their heirs with little to no out-of-pocket outlay;
- Is willing to accept some risk in order to retain capital that can continue to be invested.
Here’s How Premium Financed Life Insurance Works
- An Irrevocable Life Insurance Trust (ILIT) or other entity such as a business or partnership (“Owner”) owns the policy.
- The Owner then borrows the premiums from a third party lender.
- The policy cash values (and possibly other assets) will be required to collateralize the loan.
- The Owner either pays loan interest to the lender using annual gifts / contributions made to the ILIT or it can be added to the loan.
- If the insured dies prior to the loan being repaid, the Owner will receive the estate tax free life insurance proceeds, net the loan repayment.
There Are Eligibility Considerations for Premium Financing
Because of its complexity, premium financing is not for everyone. Lenders require that you meet certain eligibility requirements. In general, to qualify for a premium financing arrangement you should:
- Have a need for life insurance.
- Have a net worth of at least $10,000,000.
- Have a significant annual income ($200,000/year for last 3 years).
- Meet life insurance policy underwriting guidelines.
To explore options and opportunities, call Doug McClure at 520-360-8177.