How does this strategy work?
Instead of liquidating their assets to pay life insurance policy premiums, high-net worth clients may be able to secure loans from a third-party lender to pay the premiums. This strategy can work if the interest on the loans is less than the appreciation your clients anticipate earning on their other assets, and the policy is owned by an Irrevocable Life Insurance Trust (ILIT). Loan interest is paid annually and the loan principal can typically be repaid at any time up to and including at the clients’ death. If there is a loan balance at the clients’ death, part of the life insurance death benefit would repay the loan and the remainder would go to the clients’ beneficiaries.
In the right circumstances, financing life insurance policy premiums may provide a client with a better internal rate of return than paying premiums out of pocket. This will vary greatly based on the clients’ loan terms, how the non-liquidated assets perform, and the point at which the loan is repaid.
