The goal of a properly structured life insurance premium financing arrangement is to purchase permanent life insurance using a commercial loan or a private family loan where the borrowing rate is less than the policy’s crediting rate or your average ROI. At the end of a properly structured premium finance arrangement, there will be a sufficiently funded life insurance policy in place, most likely owned in an irrevocable life insurance trust. Optimally, the loan can be paid off with cash value and other assets that appreciated during the loan term. The life insurance policy ends up in the trust without gift tax or estate tax consequence. It is not uncommon for life insurance policies in excess of $20,000,000 to be received in trust without being subjected to income, gift or estate taxation. If these goals and objectives appeal to you, take a good look at life insurance premium financing.
Life insurance premium financing is exclusively for people with legitimate needs for life insurance and a long term need for death benefit. If you currently own large amounts of life insurance and fit this profile, premium financing may prove to be very beneficial in your overall estate plan.
Life Insurance Premium Financing Is Typically For:
* Clients who NEED significant amounts of death benefit and can afford the premiums, but…
* Wish to use that cash flow for other purposes, or
* Wish to reduce the potential gift tax and estate tax with minimal out of pocket strategies.
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. Life insurance financing only makes sense for the right prospects 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. Ideally, as in our firm, we have brought 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: Collateral, Recourse and Proper Origination:
1. The borrowing rate in a premium finance structure is only one consideration in the structure. The insurance company crediting rate is another.
2. The lenders and the insurance company will require 100% collateral determined by the loan balance and other factors.
3. The relationship between the borrowing cost and the carrier’s crediting rate has been correlated for decades. Insurance company’s crediting rates and dividend scales are typically greater than the cost of funds. Many insurance companies are guaranteeing 3% today but presently crediting more.
4. Over the past 5, 10, 20 or 30 years, there has been a correlated relationship between borrowing costs and carrier crediting rates. When borrowing costs increase or decrease, so too do insurance company crediting rates.
5. If you believe the correlation between these rates will permanently un-correlate– DO NOT finance a life insurance policy.
6. If you believe they will remain correlated, a premium finance structure may be beneficial for you.
7. If these 2 rates do remain correlated, there will usually be a positive arbitrage that you can depend on in the financing structure. A positive arbitrage will usually 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.
9. The cash value of the life insurance policy should provide the majority of the required collateral, including year one. A life insurance policy with little or no commission should be the preferred policy type.
10. A properly designed loan should require minimal recourse from the borrower.
With decades of experience in life insurance financing, we urge our prospective clients to act conservatively. 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 intent. I have provided expert services to law firms and State Attorney’s offices about this very issue. I cannot emphasize enough how important client intent is when financing life insurance contracts.
You will answer specific questions and statements about the need and purpose of the life insurance policy. 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 me for guidance and consultation about life insurance financing. You can Email Ted or call me directly at 561-869-4500.