PREMIUM FINANCING

Situation:

  1. Client has the net worth to pay for life insurance, but may be illiquid or have assets that are currently earning more than the potential loan interest rate
  2. Client may also have short-term cash flow issues that will be resolved later, such as a start-up company or the planned liquidation of an asset at a later time

Solution:

Your client creates an Irrevocable Life Insurance Trust (ILIT) and funds it with loans from a carrier-approved 3rd party lender. Your client applies for a universal life insurance product (UL). Once an underwriting offer has been made, client submits a premium financing application with a carrier-approved lender. The lender will establish terms of the note, including loan interest rate and repayment schedule. Client will pay or defer loan interest as specified by the loan arrangement. The policy is used as collateral for the loan, and additional collateral may be required if policy cash value does not cover the loan liability.

Benefits:

  1. Minimize gift taxes
  2. Fund a large life insurance need at a low interest cost without affecting current cash flow or requiring taxable liquidation of assets
  3. Transfer wealth without giving up control of invested assets

Considerations:

  1. Should generally not be used as a tool to fund the purchase of life insurance on a zero to minimal outlay basis
  2. Loan interest is not deductible in any circumstances
  3. Interest rates fluctuate
  4. Additional collateral may be required for clients with lower credit scores