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
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