Premium financed life insurance has seen increased interest over the past several years in large part because it offers high net worth individuals flexibility in how their capital is deployed. Individual coverage benefits from using premium financing to secure large life insurance policies run the gamut from estate tax relief to tax-free death benefit capital for heirs and beneficiaries.
There are many uses for premium financed life insurance and for the right individual, it can be a game-changer when it comes to obtaining large and often expensive life insurance policies.
Premium financed life insurance for individuals can protect liquidity
One of the most obvious benefits of premium financed life insurance centers around the retention of liquid capital. For very large life insurance policies, premiums can be quite costly. Keeping a policy in force for the duration of an individual’s life can drain precious capital in premiums. This is where premium financing can be of the greatest use.
How it works
An individual with a net worth of at least $5 million dollars requires a large life insurance policy to protect their assets and assist their heirs. Instead of purchasing a large policy and paying the high premiums, the individual works with an advisor to obtain a policy, and then procures a loan through a premium financing company from a lender to pay the premiums. In return, the individual may pay the interest or a portion of the premium on the loan.
Liquidity is the key
This is where liquidity comes into play. The loan interest is often substantially less than the price of the premium. Through the use of premium financing, the individual is able to obtain an expensive life insurance policy and maintain the integrity of the policy by choosing to possibly pay the interest on the loan. This means that the individual can spend the money that would have gone towards the premium payments on more rewarding investments and life needs.
When the individual passes away, if the loan has not been repaid already, the death benefit from the policy will cover the balance of the loan. The remainder of the death benefit will pass on to the beneficiaries of the policy.
Trust owned, premium financed life insurance for large estates can hedge against the Estate Tax
One of the more common uses of premium financed life insurance involves estate planning. In the United States, large estates are taxed upon the death of the estate holder. This tax is passed on to the heirs of the estate. It is not unusual for the heirs to be forced to liquidate assets in the estate in order to pay the estate tax.
Premium financed life insurance allows the individual to purchase a large enough policy that bestows a significant, tax-free death benefit to the heirs that will help them cover the cost of the estate tax. Life insurance policies that are placed into a family trust are valuable in that the policy should not count towards the value of the estate itself.
Working with a skilled estate planner and a reputable premium finance company can ensure that a person’s heirs are not burdened with steep taxes when their loved one passes away.
Are there any limitations on premium financed life insurance policies?
Premium financed life insurance is not suitable for everyone. In fact, in order to be eligible for premium financing, one should have a net worth of approximately $5 million dollars and may also require significant assets in order to collateralize the lender’s loan
If a person is not in perfect health, they may still be able to leverage their premium financing and obtain a life insurance policy. In many cases, the ability to finance the higher premiums associated with a person in less than perfect health can help offset the risk to the capital they would otherwise be burdened with.
Each loan has individual terms and conditions that apply.
Insurative is committed to helping clients find the perfect solution for their needs
Insurative has helped countless clients obtain significant life insurance coverage to protect their financial legacy for their families and loved ones. Our team works with estate planners, lenders, and life insurance experts to facilitate and administer premium financed life insurance policies crafted specifically for each client and their unique needs. Reach out to a team member to learn more about our process.