Is life insurance premium financing right for you?
The goal of properly structured life insurance premium financing is for wealthy people to purchase permanent life insurance. This is done using an approved, low-cost loan where the borrowing rate is less than the owners ROI and the insurance policy’s crediting rate. At the end of a properly structured premium finance arrangement, there should be an exit strategy in place to pay off the loan and leave a sufficiently funded life insurance policy to provide the desired death benefit. Ideally, the loan can be paid off with cash value in the policy and other assets which may be used to eliminate the debt.
The life insurance policy is often in a trust without gift tax or estate tax consequence. It is not uncommon for life insurance policies in excess of $20,000,000 to be in trusts without being subjected to income, gift or estate taxation. If these goals and objectives are appealing, take a close look at life insurance premium financing.
Life insurance premium financing is exclusively for those people with legitimate needs for long-term death benefit. If you currently own large amounts of life insurance or may be looking for additional coverage, premium financing may prove to be very beneficial in your overall estate plan.
Life Insurance Premium Financing Is Typically Best Suited For:
* Clients who NEED significant amounts of death benefit, can afford the premiums, but…
* Wish to use that cash flow for other purposes, or
* Wish to reduce their gift tax and estate taxes with minimal out-of-pocket cost.
Business owners who want significant amounts of death benefit for succession planning and…
* Wish to use their business cash flow for other purposes, or
* Wish to purchase life insurance with minimal impact on their balance sheet.
Business owners to fund executive benefit arrangements (capital split dollar) with meaningful death benefit amounts and…
* Wish to use corporate assets for superior ROI opportunities.
The low-interest rate environment is continuing to create a great deal of interest in Life Insurance Premium Financing. However, life insurance financing makes sense regardless of the interest rate environment. It is crucial to engage with experienced insurance professionals and experienced lenders, both familiar with recourse premium finance structures. At Life Cycle Financial Planners, we bring together the right insurance companies and the right lenders who work together to manage client expectations within a structure that works for borrower, lender and insurance company.
Top 10 Premium Finance Considerations: Arbitrage, Collateral, and Proper Origination:
1. The borrowing rate in a premium finance structure is only one of the considerations in the structure. Client ROI and the insurance company crediting rates are others.
2. The lenders and the insurance company will insist that 100% of what is borrowed (loan value) is provided as collateral from the policy and the borrower.
3. The relationship between typical loan rates and the carrier’s crediting rate has been correlated for decades. Insurance company’s crediting rates and dividend scales are typically greater borrowing costs. Many insurance companies are guaranteeing a 3% crediting rate but actually crediting more than 3%.
4. Over the past 30 years, there has been a correlation between borrowing costs and carrier crediting rates. When borrowing costs increase or decrease, insurance company crediting rates follow.
5. If you fear this correlation between rates will permanently stop – we would suggest that you are not a good premium finance candidate.
6. If you believe they will remain correlated, life insurance premium financing may be beneficial for you.
7. Typically, this correlation will produce a positive arbitrage in the financing structure. A positive arbitrage will create a hedge against interest rate volatility.
8. When interest rates rise quickly, there may be rate compression or even rate inversion. Either scenario could increase the interest expense until rates stabilize.
9. The cash value of the life insurance policy should provide the majority of the required collateral. We help design the best policy structure to create the most cash value within the policy.
10. A premium finance loan should require minimal recourse from the borrower and no personal guarantee.
High net worth couples or individuals:
• Need for substantial life insurance and insurable at reasonable rates
• Sophisticated clients who appreciate complex financial transactions involving debt
– Recognizes the need for an exit strategy other than death
What are some of the risks?
– Policy performance risk
– Increasing borrowing cost risk
– Policy lapse risk
– Collateral call risk
– Income tax risk
We recommend recourse premium finance structures that require minimal amounts of collateral other than the cash value of the life insurance policy. Never get involved in a premium finance structure unless the life insurance company is aware of the financing, the exit strategies and the overall planning strategy. I have provided expert services to law firms and other state agencies about this very issue. Proper origination is the foundation of recourse premium financing.
Many premium finance structures are nothing more than schemes to take advantage of insurance companies by purchasing policies for the sole purpose of re-selling them for a profit. The policy owner will verify that the life insurance is affordable without financing. We urge you and/or your clients to avoid using life insurance for anything but its approved uses. Stranger Owned Life Insurance (STOLI) is not legitimate premium financing and should be avoided. Having financed hundreds of millions of dollars in premiums in the past 10 years, every policy was financed with carrier approval. Carrier approval should be mandatory criteria for considering which structure to use. If the agent is not willing to disclose in writing that the carrier is on board, take a pass.
Please contact Ted Bernstein in Boca Raton, Florida for guidance and consultation about life insurance financing. You can Email Ted or contact him directly at 561-869-4500.