Premium Financing For Estate Planning Purposes

Premium Financing For Estate Planning Purposes

| March 16, 2019
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The CPA Journal had an article back in 2009 titled "Premium Financing: The Time Is Now" which discusses using premium financing for estate planning purposes for high net-worth individuals. The article makes the case of why premium financing should be considered in creating an efficient plan.

Rather than using current cash flow from a business or liquidating appreciated investments creating a taxable event one could borrow from a bank using leverage at a low-interest rate to pay for life insurance premiums. This strategy is often the most efficient and cost-effective way to pay for life insurance.

Also, borrowing at a low-interest rate to pay for life insurance premiums with a cash value linked to an index can create an arbitrage. Below are just a few of the differences between traditional insurance vs premium financing for estate planning purposes.

Traditional Insurance

For Estate Planning Purposes  

  • Most agents/brokers/CPA’s/ estate planning attorneys buy as much insurance as possible for the lowest cost and cash value to recreate term insurance
  • Coverage in many cases runs out. They use the “wait and see” approach
  • If the client outlives the wait and see approach, they are either stuck with exorbitant annual term renewal rates with no cash value return
  • The commissions paid to the broker/agent are too high, the client pays for that in large fees
  • No cash value in the policy for the first several years, if at all
  • Creates an emergency coverage situation
  • The client is looking for the lowest cost possible, he or she does not want to pay into the policy

 

Premium Financing

For Estate Planning Purposes  

  • Overfund the policy
  • Loan from the bank to pay premiums
  • Not a MEC
  • Low or no-cost commissions on portions of the premiums
  • Creates value
  • 84-98% of the premium is cash value in the policy from day one
  • Commission is lower. The Commission paid is 60-70% less than traditional insurance
  • Less exposure means lower cost of insurance per thousand
  • Loans have no personal guarantee. An ILIT or LLC borrows the money
  • APB good to age 120 as additional coverage, non-commissionable in some cases
  • Removes life insurance from the commodities market, it is a solution, not a product
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