|
|
|
|
|
|
|
An Overview of Premium Financing Premium financing allows high net worth individuals with illiquid assets (i.e. real estate) or inconsistent cash flows (business owners), to fund a life insurance policy without disrupting their current investment and business interests. The individual can take out a loan from an institutional lender. The lender pays the premiums on the policy and the policy owner gifts the interest payments on the loan to a trust. To illustrate the growing need for such a service, it is important to consider the net worth of individuals over age 55 has increased dramatically over the past decade. These individuals have a definite need for estate planning and life insurance, but finding liquid assets to buy a life insurance policy is often difficult. For instance, they may not want to liquidate assets that are performing well, or, they may not want to pay income or capital gains taxes that would result from liquidation. In addition, business owners may be very reluctant to remove large cash positions from their operating budget. The premium financing option allows clients to reap the benefits of their investments or business interests, as well as, put a much needed life insurance policy in force. Premium Financing Candidates The ideal premium financing candidate has a need for death benefit protection offered by life insurance, but does not want to liquidate current assets or business interests in order to pay premiums. The applicants generally must have minimum insurable net worth of $5 million and need a life insurance policy with a minimum annual premium of $100,000. Eligible candidates are usually at least 60 years of age but not older than 90, and a U.S. resident. The Structure of a Premium Financing Program Under this approach, clients may borrow premiums and reduce their potential out-of-pocket expenses and avoid maxing out their gift tax exclusions. The insured will set up an irrevocable life insurance trust (ILIT). This separate entity can then apply for, own, and be beneficiary of the life insurance policy. In addition, the ILIT will secure a loan from a lending institution, using the life insurance policy and possibly other liquid assets as collateral. The lender then wires the premium payment directly to the insurance carrier. The ILIT will also be the source of annual interest payments made to the lender for the loan, so the ILIT must have enough capital to make these payments. The premiums can be borrowed, but the interest due on the loan cannot. However, the interest can be paid in advance, in arrears, or deferred for a limited period of time. Generally, the rate used to determine the interest is the London InterBank Offered Rate (LIBOR). Historically, the LIBOR, has been lower than US Prime Rates. The loan may be paid back in a lump sum, over time, or at the death of the insured. If paid back at the death of the insured, the loan repayment is deducted from the death benefit, and the ILIT captures what remains. The death benefit purchased is often greater that what is required, or a ROP (return of premium) rider is used to ensure the estate nets sufficient coverage. The Benefits
The Process
Conclusion: Individuals are able to leverage illiquid assets by establishing an ILIT that will take out a loan to finance life insurance. The premium financing strategy is a good alternative for high net worth individuals that have a high, illiquid asset base. A Case Illustration: Abigail Smith's net worth has grown substantially over the past ten years due to her savvy business ventures and real estate investments. Her net worth now tops $20 million. Abigail is age 76, a widow, and in good health. Her overwhelming success has caused her to realize that it is time for her to get her financial house in order. She meets with her financial advisor for advice. Abigail's financial advisor determines, after studying her current situation that she needs at least $10 million of life insurance in order to be sufficiently covered. However, Abigail is faced with the compelling issue of how she is going to come up with the premiums to cover her life insurance. Most of her assets are in illiquid real estate, and since it is expected to perform well over the coming years, she does not want to sell any of it and lose out on that growth opportunity in order to pay life insurance premiums. Her advisor presents her with the premium financing strategy as a potential solution. Her advisor recommends that she establish an ILIT, which will then apply for, own, and be the beneficiary of the $10 million life insurance policy. The ILIT will then apply for a loan to cover the funding of the life insurance policy, thus eliminating the need for her to liquidate her real estate holdings. First, the trustee of the established ILIT will apply to the life insurance carrier for a $10 million policy (universal life). Once the insurance company makes an acceptable underwriting offer on the application, the trustee of the ILIT will apply to a lending institution for a loan to finance the premiums. Her financial advisor will submit all required financial documents to the lender for review. Her advisor also recommends that Abigail include a 100% Return of Premium rider on the death benefit, which will ensure that there will be enough money in the ILIT to pay off the loan at her death, since the ILIT will be relying on the death benefit to repay the loan. This Return of Premium rider will increase the premium to $511,210 annually (up from the $285,456 without the rider), but it will also ensure that after the loan is paid back, she captures the entire $10 million death benefit. |
 |
|||
 |
 |
 |
 |
