Life insurance premium finance
Wealthy clients have a present need for life insurance protection – whether it is estate planning, business succession planning, part of a wealth accumulation/preservation strategy, retirement or self-generated pension – but the client has sound financial or business reasons not to liquidate his/her assets in order to fund the insurance need. Life insurance premium finance may be a solution. This involves the proposed policy owner obtaining financing from a financial institution to pay the annual life insurance premiums. This strategy allows clients to benefit from being protected by the life insurance policy – with the leverage of premium financing – all while utilizing the tax preferred features of life insurance.
A traditional life insurance premium financing arrangement will involve the following:
- Life insurance premiums are paid by a term loan from a bank; with premium advances up to 10 years
- Collateral for the loan is provided by the life insurance policy values and any additional collateral shortfall not covered by the policy values in initial years can be satisfied through a letter of credit or other like sources
- Borrower may elect to service interest on the premium finance loan annually in full or, in qualifying circumstances, partial interest and accrue the remainder. In any interest arrangement, it will be far less than the actual premium would be. For estate planning purposes and to prevent unnecessarily eating away at life time gift tax exceptions, qualified clients may be able to service interest up to their annual gift tax exemption
- Loan terms generally do not exceed 10 years. Loan payments may be from refinancing, policy withdrawal, outside liquidity cash payment, policy maturity, or a combination of options
- Combines the power of the preferred tax treatment provided in the life insurance policy with the power of leveraging financing for the premiums