Owning a business is the ultimate balancing act, and the bigger your company is, the more complicated the task can become. Not only do you have to take into consideration the financial and material needs of your business to stay up and running, but you also have to be mindful of your workers – both their professional and personal lives – so they can continue to perform.
“Mosts life insurance policyholders are covered through their employers.”
Among their biggest needs is life insurance. If nothing else, life insurance provides peace of mind, so in the off chance something serious happens to your employees, their families won’t be burdened with the financial fallout that can result. More entrepreneurs are cognizant of their employees’ long-term welfare, as for the first time ever, more Americans have life insurance coverage through their workplace than individual plans. Indeed, according to data from the financial institution LIMRA, roughly 108 million people in the U.S. have employer-based life insurance, compared to 102 million who own individual life coverage.
But when you have a thriving business and your financial resources are tied up in ensuring its continued growth, where do you find the money to pay for the premiums on your employees’ life insurance?
That’s where life insurance premium financing comes into play. If you’ve heard about premium financing but weren’t exactly sure how it worked or whether it was worthwhile, the following should give you a better idea of what it’s all about and if it’s something that you should consider.
What is life insurance premium financing?
Life insurance premium financing is basically a method of paying for life insurance without having to liquidate assets that are already in use. A common strategy of both high net worth individuals as well as successful businesses, life insurance premium financing usually involves three parties: The buyer, the insurance carrier and a third party, typically a lender. The buyer takes out a loan – in this case, the buyer is a business – to pay for the high-value life insurance policy. The insurer then makes the coverage available and the buyer repays the loan until the balance is paid back with interest by the borrower or irrevocable life insurance trust, better known as an ILIT.
Jon Scaman, senior financial services manager at non-bank licensed insurance agency Global Financial Distributors, noted that at his company, life insurance premium financing is known as Leveraged Planning®.
“We call it Leveraged Planning because of the way we do it,” Scaman explained. “We call it this because we ‘leverage’ the assets to the buyer, such as a business, and these assets can then be used for business owners’ future use.”
What are the typical characteristics of a life insurance premium financing buyer?
Both high net-worth individuals and entrepreneurs utilize life insurance premium financing, but there can be confusion as to how much an individual or company should be earning for this strategy to be worthwhile. Scaman noted that generally speaking, businesses owners should ideally have a minimum net worth of $1 million and a company established for at least five years. FICO scores should also be greater than 500. None of these ideal characteristics are written in stone, however.
Additionally, life insurance premium financing is a strategy entrepreneurs pursue.
“Ninety percent of our clients are business owners,” Scaman said. “We can lend to a business owner and not require a personal guarantee.”
Life insurance plans by their very nature are unique and structured in a manner that is in line with the policyholders’ needs. Similarly, life insurance premium financing programs are geared to provide the coverage that employees need without compromising the objectives of the business, which can sometimes result when key assets are liquidated to pay for policy premiums.
When is life insurance premium financing not worth it?
Though this strategy can make a lot of sense, there are circumstances in which the risks outweigh the rewards. For instance, interest rates can increase sharply. Even here, though, the Federal Reserve has penciled in three potential quarter-percent increases in 2018, placing the benchmark at around 2 percent, which is still historically low.
Scaman noted that a better determinant of whether life insurance premium financing makes sense is how much life insurance a business needs.
“The minimum policy should be $100,000,” Scaman explained. “We usually like to see a length of seven years as well, but we’ll sometimes do five years.”
He went on to say that if policies are smaller than this, business owners are better off buying directly from the insurer.
What sets Global Financial Distributors apart from its competitors is its ability to help clients recognize when life insurance premium financing is in their best interest. GFD also specializes in customization, ensuring that the design and implementation fits business owners’ needs. Here are more details on what makes Leveraged Planning® an ideal life insurance premium financing option.