Is premium financing suitable for you
Premium financing has been around for many years, enabling the ultra-wealthy to obtain large amounts of life insurance without paying premiums out of pocket. This strategy is now available to a wider variety of clientele.
In the broadest explanation, premium financing uses the bank’s money to fund large amounts of life insurance.
Premium financing may seem a bit unorthodox for those only familiar with run-of-the-mill strategies, but it offers incredible advantages that can radically shift your financial future.
Main Premium Financing benefits
- Purchase very large amounts of life insurance without having to cough up large premiums. Instead, pay the interest on the loan.
- Reduce the out-of-pocket cost for life insurance and retain your capital for other growth opportunities.
- Additional tax-free income stream from the positive arbitrage between the interest on the loan and the return on the life insurance cash value.
- Utilizing gifting effectively by gifting only the interest of the loan instead of the principal.
- Avoiding a “fire sale” of your assets by your heirs due to estate taxes which are due within 9 months.
Your obligations
- You must understand the importance and have the need for a large amount of life insurance, regardless of how you plan to fund it.
- Your net-worth must be over $5M.
- You should have the ability to provide collateral for the years where the loan balance is more than the policy’s cash value.
- You will pay the interest on the loan.
Myths that you should be aware of
- Myth #1: It’s free insurance.
- Myth #2: It’s suitable for everyone.
- Myth #3: It’s risk-free.
- Myth #4: It’s only for new insurance policies.
- Myth #5: Any Financial planner can set it up and manage it for you.
Premium financing is NOT free insurance and it is NOT for everyone.
It’s only relevant to high-net worth individuals that are comfortable with collateralized financing deals.
Is it risk free?
No, like in any collateral-based financing deal, risks exist. The question is how you manage those risks and whether or not you work with a professional planner who has enough experience to avoid them.
Your financial planner should be able to predict potential risks and take precautionary measures, even when drafting the first case designs.
2 Minutes Explanation
A quick overview of the process
- Determining insurance protection needs.
- Performing a financial suitability analysis.
- An initial design is developed and discussed with you thoroughly.
- Illustrating and analyzing multiple variations of the design until YOU determine the ideal plan, while we personally explain and walk you through each step of the process.
- Insurance underwriting process begins (Medical & Financial).
- Lender financing applications are submitted to seek the most attractive interest rate and terms from multiple lending institutions.
- An Irrevocable Life Insurance Trust (ILIT) is created.
- The policy is issued by the insurance carrier.
- The client provides collateral to the bank and is granted approval for the loan.
- The bank transfers the premiums directly to the insurance company while the client pays the interest on the loan.
- Annual reviews occur to examine policy performance and ensure successful loan renewals.
- When the policy’s cash value has grown to sufficiently cover the loan principal (typically after 10-15 years), it is withdrawn to satisfy the outstanding loan.
WHAT'S NEXT
We’d be more than happy to have a quick conversation. We’ll work together to find our chemistry and evaluate whether we can deliver our signature positive financial impact for you.