At American Business, one of our primary goals is to educate trusted advisors and their clients on life insurance matters that can better inform their decision-making when it comes to life, long-term care and disability insurance protection.
Through 50-plus years in business, our firm’s professionals have offered an array of independent and sophisticated solutions to our clients. For high-net-worth individuals, one of the more creative and impactful strategies for funding life insurance premiums is premium financing.
High-net-worth individuals often have a predetermined need for substantial amounts of life insurance. They seek to preserve their hard-earned assets and take advantage of today’s low interest rates. Premium financing as a strategy accomplishes these goals by offering such individuals an alternative method of funding life insurance premiums.
With premium financing, premiums are borrowed from a commercial lender so that the insured’s investment portfolio or other assets can remain intact. Doing so can help to preserve the insured’s standard of living, since he/she doesn’t need to access cash flow to make large premium payments. It also may allow them to avoid liquidating assets that could incur transaction costs and capital gains taxes—and it may provide a tax-free benefit that is not included in the insured’s estate, and further helps protect their net worth.
So, who fits the target profile for this strategy?
Premium financing is designed for high-net-worth individuals with incomes in excess of $250,000 and assets (excluding their principal residence) in excess of $5 million—ideally, in excess of $20 million. As mentioned, these individuals need life insurance, but they are open to evaluating funding alternatives. Most have high-performing investments or business interests; they don’t need to borrow at all; generally, they are in roles (e.g., business owner, real estate developer, family office) that necessitate an understanding of leverage; they have the ability to post collateral; and they qualify both medically and financially for a life insurance contract.
How It Works
The most common approach to premium financing involves borrowing at a loan interest rate that is currently lower than what is expected to be earned on investments or other assets. Lenders require collateral, and it is generally made up of the life insurance cash surrender value plus a portion of other liquid assets, including marketable securities. At a time in the future, the loan principal is paid back with a planned loan exit strategy which may include payment from the policy cash surrender value. If death occurs earlier than the planned loan repayment, the death benefit will satisfy the debt.
Advantages of Premium Financing
- A reduction in out-of-pocket payments for life insurance. An attractive interest rate on borrowed funds results in reduced current net out-of-pocket cost for the life insurance coverage.
- Little or no impact on current investment portfolio. With premium financing, the insured can obtain needed coverage and maximize the time value benefits of their money without liquidating high-performing assets and paying income taxes.
- Potentially favorable gift tax results. The grantor of the trust owning the life insurance policy will generally need to gift interest payments only, rather than the entire premium payment.
- The cost of borrowing is potentially less than the return on existing assets “not liquidated” when compared to other assets liquidated to pay life insurance premiums.
- In volatile markets, the insured’s current investment portfolio may be protected from poorly timed liquidation.
Trusted Insurance Partners Can Help Clients Leverage Powerful Tools Like Premium Financing
Premium financing is an insurance strategy that offers very attractive benefits for high-net-worth individuals from a tax and asset preservation standpoint. From our experience, many of these individuals aren’t aware of premium financing as a life insurance strategy—but they should be, given its many and varied benefits.
That said, implementing a premium financing strategy can be complex, and there are many tangential issues to consider. When it comes to navigating premium financing and other insurance pathways for high-net-worth individuals, we believe the road is best traveled with an experienced, independent and trusted partner. At American Business, we appreciate the opportunity to bring these important issues to light, and help you and your clients navigate the complex and evolving life, long-term care and disability insurance landscape.