What is Premium Financing
Premium Financing is an innovative alternative for funding life insurance premiums. Financing arrangements are designed to even further leverage insurance premium dollars while providing the needed insurance coverage at a more economical cost.
Benefits
- Reduce current out-of-pocket cost for life insurance coverage
- Minimal or no impact on current investments
- Potentially favorable gift tax consequences
- Provide liquidity in a large illiquid estate
- Deferring or avoiding capital gains taxes payable from liquidating appreciated assets
Premium Financing enables individuals with a high net worth to purchase life insurance without depleting other assets or changing their normal cash flow. They are able to protect net worth, continue business development, and pass their financial legacy to future generations without altering other financial objectives.
Eligibility
Not all can participate in such a strategy. Here are some parameters for those who would qualify for such a plan. They are:
- Have a need for life insurance
- Have a net worth of $5,000,000 +
- Have an annual income of at least $200,000 +
- Have sufficient assets to pledge as collateral for a Letter of Credit (generally to pay the difference between the surrender amount of the policy and the outstanding loan.)
- Based on underwriting can qualify for a life insurance policy
- Consign to a minimum of $1,000,000 in loans to provide premium
Considerations
Collateral
- Policy surrender value is the main source of collateral for loans
- The amount of collateral required vaires between the various lending strategies
- Collateral needs are most commonly covered by a Letter of Credit
- Letter of Credit must be provided for AA rated banks
- Other items used for collateral.
- Cash
- Brokerage Accounts
- Real Estate
- Collectables
Plan Designs
Alternative Plan Designs
- Accruing Interest - The client does not pay the interest of the loan. Rather, the annual interest due is added to the loan principal and paid out of the policy death benefit at the insured's death. Thus, causing the amount of the loan to be greater.
- Interest paid - The client pays the interest of the loan with their own funds. The loan is for only the amount of the premiums to be paid
- Rollouts - Taking a large enough loan to over fund the insurance policy so that in time the client can take a loan out of the insurance policy to pay off the entire loan.
By working through one of these cases you can grasp all the complexities and variables involved. At Premium Financial Advisors, Inc. our advisors are experienced in multiple tools and techniques, so that your client's various needs are met. We have experience working with lawyers and accountants, to help them understand all of the plan designs.
When combining all of these financial aspects, we provide clarity to clients so they can feel comfortable and confident in how their objectives will be achieved. For this reason it is vital that we work along with the client's personal accountant, lawyer, and personal representative (Trustee).
These are our deliverables so your client can achieve the financial plan he needs and desires.
- Prepare advisors to answer client's and their advisor's potential issues.
- Generate illustrations and case design
- Personalize illustrations into a presentable format.
- Coach lawyers and accountants of what will be involved and provide sample documentation.
- Coordinate with the lender to achieve the financing, and is completed in a timely manner.
- Provide bank with instructions regarding letters of credit.
Sample Cases
Click here to download sample cases
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