Life insurance premium financing is not a life insurance product per say, but a way to purchase life insurance coverage using OPM (Other People’s Money). Premium financing is a strategy that is most effectively employed for the affluent person with an estate size in excess of 10 million dollars. The essence of premium financing comes from the realization that the “true cost” of paying the premium for the life insurance will be more than the actual death benefit before life expectancy.
The foundation of the “True Cost” of life insurance methodology assumes that the cost of purchasing a Universal Life or Whole Life policy is not simply the annual or cumulative premiums. Rather, this premium financing approach evaluates:
- Pre-tax cost associated with the premium.
- Pre-tax cost associated with making annual gifts to an ILIT (Irrevocable Life Insurance Trust).
- Opportunity cost of money.
How Costly Is The “True Cost”?
Assuming a combined federal and state tax of 40%, a gift tax rate of 50% and an opportunity cost of 10%, the “True Cost” of a $500,000 premium is actually $1,375,000.
Premium financing is one strategy to consider when there is concern about the “True Cost” associated with the purchase of life insurance.
The Most Talked About but Least Implemented Strategy
Why…because premium financing is not something the average life insurance agent or broker understands and neither do most tax attorneys or CPAs. It is synergistic approach using cutting edge life Universal Life insurance products coupled with non-conventional underwriting. Premium financing involves a number of variables that demand an intimate understanding of both the life insurance and premium financing components. Many insurance companies have now jumped into the premium financing fray by adjusting their products to mimic proprietary premium financing arrangements. However, most do not allow enough flexibility to meet the needs of wealthy clients from the standpoint of credited interest rates, collateral assignment or financing options.
Proprietary Premium Financing
Proprietary premium financing affords the client the best of both the financing arrangements as well as the best products from insurance companies that work in concert to produce optimum results: No out-of-pocket premiums paid. In this arrangement, both premium and interest are financed (and collateralized) and as the loans grow, the death benefit is adjusted UPWARD so that ultimately (at death) all loans are satisfied and the net death benefit going to your heir’s stays constant.
How are Policies Utilizing Premium Financing Collateralized?
The collateral needed to back the loans for a premium financed policy is derived from the cash values of the Universal Life insurance policy itself as well as a portion of the estate assets of the insured. The collateral required could diminish as the policy’s cash values grow.
Is Premium Financing an Option I Should Consider?
Premium financing should be considered if you are unable to gift the entire life insurance premium to an Irrevocable life insurance trust using your annual gift exclusions. Premium financing should be considered if you have exhausted your lifetime credit since large annual gifts to an ILIT will cause a gift tax as high as 50%. Also consider premium financing when the pre-tax cost associated with the premium is high do to income taxes or capital gains tax. Here’s another reason to consider premium financing: Regardless of where the premium originates, there is an opportunity cost associated with using the money to buy life insurance. What return is being given up for the alternative use of the money? Whether the source of the premium is a business, marketable securities or cash, there is a measurable annual and cumulative cost associated with using the funds to pay life insurance premiums.
Call 866-701-8026 to talk with a premium financing specialist today.
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