Like most wealthy people, you have a need for life insurance to protect your family, and have plenty of capital to pay for it. However, your net worth may be tied up in illiquid investments such as real estate or a business, or you have invested in a highly appreciated stock which you prefer to not want to liquidiate at this time. How can you secure essential life insurance protection without liquidating high-performing stocks? Premium Financing may be the answer.

WHAT IS PREMIUM FINANCING?

Premium Financing is a technique for you to borrow money from a 3rd party lender to make payment of the premiums on a life insurance policy, which is normally held in an ILIT. As a result, you can conceivably bypass loss of opportunity cost on your current investments and then pay the loan off later on when your portfolio is more liquid or when the interest rate is no longer advantageous.

HOW DOES IT WORK?

You (or your Irrevocable trust) will obtain a life insurance product. Once an underwriting offer has been presented, you will then submit an application to the bank. The lender will form the terms of the loan, containing the loan borrowing rate and payment schedule. You or your Irrevocable life insurance trust will then make payment of loan interest every year on the uncollected loan at the rate determined by the bank. At your death, the life insurance death benefit are paid to you or your irrevocable life insurance trust, Less the loan repayment. During the existence of the loan, the life insurance policy surrender value can be applied as collateral for the loan. The bank may also demand additional security to cover the period of time before the policy’ssurrender values are adequate to cover the loan liability. Typically, you will secure the loan and pledge collateral even if the irrevocable trust is the policy owner.

BENEFITS

Premium Financing can allow the funding of an ample life insurance desire at a low interest cost without affecting your current cash flow.

You might be able to acquire money from a lender at a low interest rate expense without liquidating taxable assets that might be earning a higher rate of return than the loan interest cost.

You may be able to secure life insurance coverage without giving up use of stocks.

CONSIDERATIONS

Premium Financing should mainly not be applied as a financing tool to acquire life insurance on a zero to minimal spending.

The loan interest cost will change over the term of the loan and might end up greater than originally discussed. The loan interest is not deductible under any circumstances.

If loan interest is put off till a later time, the possibility of an unmanageable loan balance can result. For that reason, deferred interest should be used only in limited situations and not for more than five years.

Although in many cases the loan can be repaid from the policy at death, it is valuable to consider alternative sources that may be available to repay the note balance throughout life.

Learn more about premium finance.