The Ultimate Guide to Life Insurance Premium Financing (Ultra Affluent Families, This One’s For You…)

Life insurance premium financing enables an owner of a life insurance policy to borrow money to pay premiums. There are several different scenarios where life insurance premium financing may be applicable. For purposes of this post, we will focus primarily on its use for estate planning purposes. The premise for life insurance premium financing in the estate planning process is relatively simple.

A high net worth individual or married couple needs life insurance to provide estate liquidity.

Due to a number of factors they may be unable or unwilling to make premium payments to secure the needed life insurance coverage.

Benefits of Life Insurance Premium Financing

• Premium financing can allow for the funding of a large life insurance need with little impact on cash flow.
• By borrowing money at a low rate you may avoid the loss of potential gain on existing assets with the ability to earn a higher rate of return.
• You may be able to secure needed life insurance coverage without having to give up the use of existing assets or avoid the liquidation and taxation of highly appreciated assets.
• Enable you to transfer wealth without giving up control.
• Minimize gift taxes.

How Does Life Insurance Premium Financing Work?

Using premium financing to fund a life insurance policy can seem complicated at times. By working with a firm or individual who has experience with premium financing can be of great value. You should also include your estate planning attorney and trustee as a part of the decision-making process. It can also be of great value to include your accountant. Once the decision is made to use premium financing the process is split into two phases: underwriting and implementation.

Phase I – Underwriting

The Underwriting Phase of the premium financing process involves underwriting both the life insurance coverage and third-party loan. Each process has its own set of requirements.

Life Insurance Underwriting includes:

• Formal Carrier Application
• Obtainment and review of medical records
• Financial information to support the amount of coverage requested
• A medical exam performed by a third party examiner
• Phone Interview

When specifying the ownership and beneficiary of a life insurance policy for estate planning purposes it is common to use an Irrevocable Life Insurance Trust (ILIT). This allows for policy proceeds to be paid to the trust estate and income tax-free. If an ILIT doesn’t exist, the insured(s) estate planning attorney should draft one prior to or during the underwriting process. NOTE: Before any recommendation is made to move forward with premium financing – we always suggest informally underwriting the insured(s). By receiving authorization from the insured(s) to obtain medical records we are able to secure informal offers from multiple insurance companies. This allows us to evaluate and recommend the carrier and product most suitable given the client's specific needs.

Premium Financing Loan Underwriting includes:

• Credit Application
• 3-years of personal tax returns
• Personal Financial Statement
• Recent brokerage statements

When the life insurance premium finance lender approves the loan a term sheet is issued. The term sheet will contain the terms of the loan. This includes the loan interest rate, repayment schedule, length of the loan, and other loan requirements. The Underwriting Process can take anywhere from 2 weeks to 3 months – or longer. The faster the insurance carrier and lender receive outstanding requirements – the quicker it is to receive approval. When the life insurance and premium financing loan underwriting is complete, the results are reviewed with the client and their advisors to determine whether or not it makes sense to move forward. Upon approval, it is time to move forward to Phase II – Implementation.

Phase II – Implementation

The Implementation Phase of life insurance premium financing connects the entire structure. By now the irrevocable life insurance trust has been executed and the life insurance policy and loan documents have been issued. At this point the parties to the transaction need to:

1. Complete and sign the Delivery Requirements from the life insurance carrier,
2. Sign and execute the loan documents from the third party lender, and
3. Pledge collateral for the difference between the loan amount and policy cash surrender value.

From here the bank will lend the annual premium to the ILIT. The ILIT and/or the insured will pledge collateral for any shortfall to the bank that may exist. The ILIT then makes a premium payment to the insurance company. The insured makes interest payments on the loan. Upon the passing of the insured(s), life insurance proceeds are paid to the Irrevocable Life Insurance Trust net of the outstanding loan balance – assuming repayment of the loan did not occur during the life of the insured. There are a few scenarios that exist where it makes sense to exit or pay off the loan prior to death. You can discuss these scenarios with your estate planning attorney or schedule a time to discuss your situation with us.

Who Needs Life Insurance Premium Financing for Estate Planning?

The profile of an individual or married couple who should consider life insurance premium financing would be those whose:

• Taxable estate exceeds $10 million (this assumes you have already used your lifetime exemption).
• Net worth is made up of sixty percent or more of privately held stock, real estate, or other illiquid assets.
• Interested in minimizing estate and gift taxes

Final Thoughts on Life Insurance Premium Financing

Life insurance premium financing can be a very effective tool for the right person. However, a large majority of people do not fit the profile of the right person. All too often life insurance agents attempt to use life insurance premium financing as a way to make a sale. This is done by trying to convince the insured (and the insured(s) advisors) of how “cheap” the coverage is since they are only paying interest on the loan.

Life insurance premium financing should never be the reason any one purchases life insurance coverage.

The need for life insurance coverage should be the reason to obtain coverage. Premium financing is nothing more than the funding mechanism used to solve the need. There are many variables involved with life insurance premium financing. Borrowing rates can fluctuate, policy performance can vary, and the availability of collateral in the future all play an important role in deciding premium financing make sense for you. When evaluating life insurance premium financing it’s important to work with an individual who is experienced and understands premium financing – and who is committed to maintaining ongoing support and reviews.

DISCLOSURE

TAX ADVICE

Any tax advice contained in this communication is not intended or written to be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

These materials are not intended to be opinions or advice on legal, tax, accounting, or investment matters. Private counsel should be consulted prior to application of this general information to specific situations.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

The information contained in this article is hypothetical. Results and performance will vary based on a number of factors. If you are interested in life insurance premium financing you should consult with a licensed advisor to help you understand and evaluate your options.