February 22, 2018
Premium financing allows qualified borrowers to use third party financing to pay for significant life insurance premiums.
Many insurance companies are creating products specifically for these finance plans – products intended to maximize returns while minimizing collateral requirements. Both businesses and individuals can leverage currents assets and maximize their returns through a predetermined cash flow.
Each premium financing strategy is a bespoke creation, designed to meet the coverage needs and financing specifications of each client. It works like this:
1. Ascertain coverage needs
2. Collaborative preliminary case design
3. Identify optimal plan
4. Initiate formal bank and insurance carrier underwriting
5. Issue policy (insurance carrier). It is recommended that the strategy be initiated inside an Irrevocable Life Insurance Trust (ILIT)
6. Provide collateral (client) – often it is policy cash value plus cash/cash equivalents. Then the bank pays the premiums to the insurance company.
7. Conduct annual reviews and analysis of policy performance
8. Refund premiums (repay the loan) once the policy has generated sufficient cash value
Many insurance companies are amenable to premium financing, although it is reserved for qualified clients. The preferred client has a minimum net worth of $5 million, although the favored figure is $25 million.
And why is premium financing an effective tool? For one thing, the capital not spent on premiums can be invested elsewhere and generate returns. The insurance company’s crediting rate may be greater than the borrowing costs, and the investment returns on funds not used for premiums may be greater than the borrowing cost. Plus, with the established cash flow, the client may be able to buy more insurance than if her or she had simply paid the premiums. Finally, it can help reduce or eliminate gift taxes.
Indeed, there are many benefits that may accrue from this strategy, but it takes a team of financial, legal and tax experts to set up this complex transaction.