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PREMIUM FINANCING

WHAT IS PREMIUM FINANCE LIFE INSURANCE?

Premium finance is a strategy where policyowners will pay massive life insurance premiums in conjunction with borrowing from a third-party lender, rather than tying up their own capital.

WHAT IS PREMIUM FINANCE LIFE INSURANCE?

Just like how the wealthy expect extremely favorable loan terms to purchase real estate, they are often offered sweetheart loans to purchase large amounts of life insurance instead of paying premiums out of pocket.

Typically, the borrowing policyowner will make regular payments on these premium finance loans. However, some do choose to roll up or capitalize interest into their premium financing arrangement, anticipating that the cash value growth of the underlying life insurance will outperform the accruing loan interest. It is worth noting that the borrower is responsible for posting collateral whenever the cash surrender value of the life insurance policies is less than the outstanding loan balance.

WHY USE PREMIUM FINANCING?

WHY USE PREMIUM FINANCING?

Simply put, the leverage available from premium financed life insurance allows policyowners to acquire substantially more life insurance for a small fraction of the cash flow outlay normally needed to support this big of a policy. This not only allows them to keep other assets performing elsewhere, but it often produces a very attractive tax-free IRR (internal rate of return) for a relatively nominal out of pocket cost.

The ideal plan for most premium financed life insurance strategies is that the low-interest payments to borrow these massive early premium payments creates a compounding snowball of cash value growth.

If the cash value compounding overcomes the extremely low hurdle rate of the premium financing, then the policy itself can absorb the loan using the built-in policy loan feature, as well as provide the policyowner a substantial windfall. These future policy distributions can be in the form of supplemental tax-exempt retirement income, a tax-free death benefit to heirs, or both.

Most premium finance clients fall into these camps:

  • For wealthy families whose asset base is largely illiquid (real estate or closely held business interests), premium finance can be an ideal option to help them expand their personal estate planning without upsetting the apple cart.

  • Many high net worth individuals have been using premium financed life insurance as a synthetic ROTH of sorts since actual ROTH IRAs have low contribution limits and even prohibit high-income earners from contributing. The leverage available from premium finance also offers appeal since over the last 25 years there has been a favorable spread between the low borrowing rate and the potential for cash value growth within the policies.

  • For established businesses that need to maintain a strong balance sheet to acquire certain contracts, bonding, or other loans to keep their operations intact, premium financing allows them to acquire key person protection for invaluable employees or to shore up buy-sell agreements amongst the owners. More recently we are also seeing businesses and even universities set up “golden handcuff” retirement programs for highly paid employees whom they wish to retain and reward.
HOW DOES PREMIUM FINANCED LIFE INSURANCE WORK?

HOW DOES PREMIUM FINANCED LIFE INSURANCE WORK?

Typically, a high net worth individual (or his/her ILIT trust or business) applies for copious amounts of life insurance for estate planning or retirement planning. The life insurance policies will largely be Indexed Universal Life (IUL) or Whole Life insurance since lenders recognize that these types of policies are quite stable and can therefore offer a very high loan-to-value ratio of 90% or higher.

The premium financed life insurance policies will most often be funded with the maximum allowable premium during the first 4-7 years to achieve high early cash value as well as strong long-term performance.

WHAT ARE THE BENEFITS OF PREMIUM FINANCED LIFE INSURANCE WHILE LIVING? THE PROS OF PREMIUM FINANCING

WHAT ARE THE BENEFITS OF PREMIUM FINANCED LIFE INSURANCE WHILE LIVING? THE PROS OF PREMIUM FINANCING

The main benefit of premium financed life insurance is the ability to acquire substantially more life insurance for a significantly lower cash flow outlay. Keep in mind though that premium finance will of course look great when showing today’s favorable spread as a constant that compounds favorably for decades into the future. Quite simply, a properly-structured premium financed life insurance strategy allows you to potentially earn copious amounts of tax-exempt interest on an increasing cash value balance while paying simple interest on a flat balance (once all premiums have been borrowed).

6 MAIN BENEFITS PREMIUM FINANCED LIFE
INSURANCE PROVIDES INDIVIDUALS:

6 MAIN BENEFITS PREMIUM FINANCED LIFE INSURANCE PROVIDES INDIVIDUALS:
  1. Replaces the need for paying wasteful term insurance premiums typical of high-income earners during working years.

  2. Substantially more cash value compounding in your favor (even if encumbered by the premium finance loan).

  3. The ability to keep your other liquid and illiquid assets deployed elsewhere.

  4. Potential for positive arbitrage between the policy’s cash value growth rate and premium financed loan rate (obviously dependent on actual performance).

  5. Potential for supplemental tax-exempt retirement distributions that would be immune from your highest and most penal tax brackets.

  6. And/or the existence of a tax-free death benefit outside the estate, which allows the insured to tactically spend down less tax-efficient assets in their estate during their lifetime as well as the ability to utilize other more complex estate planning strategies (all dependent on additional estate planning).

For more information about our firm and the services we offer, send us a quick email or call the office. We would welcome the opportunity to speak with you.

info@wyattfinancialsolutions.com  |  833-777-2224