The benefits of life insurance premium financing in uncertain times

COVID-19, the novel coronavirus that has swept the world and tragically killed nearly 200,000 people, according to data from Johns Hopkins University, shows that life can change overnight. Due to the shutdowns designed to slow the spread of the contagion, economic devastation has rocked numerous industries, including airlines, hotels, retail, restaurants and real estate. The stock market, whose valuation reached an all-time high as recently as February, has lost nearly all of the gains it had accrued since 2016. Millions of Americans have either lost their jobs or received lengthy furloughs.

With more people staying and working at home to ride out the adverse health and economic storm, the instability that's resulted has many reevaluating their lives, including the importance of estate planning. As such, some are reaching out to life insurance companies and insurance agents for advice on developing a sound, responsible financial strategy.

"The strategy allows you to pay the policy premiums while retaining control of more of your assets."

A potential game plan for some individuals to consider is financing the premiums of a high cash value life insurance policy. You've likely heard of life insurance premium financing and wondered, "What exactly is that?" or "How can financing for life insurance help me achieve my long-term personal and business goals?" With Global Financial Distributors as your guide, this financing strategy – Leveraged Planning Solutions® is the perfect way to build wealth, plan for the future and establish a lasting legacy for your family or thriving family owned business.

What is premium financing for life insurance?

As a high-net worth individual or business owner, you undoubtedly have lots of responsibilities that require ongoing protection But you likely also have a number of expenses and costs that you can't simply eliminate due to their importance. Thus, the money you might normally use to protect your assets may not be immediately available. These priorities require money to protect. However, the funds that you might normally use to pay for coverage may not be immediately available.

This, in a nutshell, is what makes premium financing for life insurance so special. In essence, the strategy allows you to pay the policy premiums while retaining control of more of your assets.

Life insurance premium financing does so much more than provide you with a high cash value life insurance policy. It also helps you with estate planning, something that far too many Americans say they haven't done as much as they should. Indeed, the same is true for preparing for retirement, or lack thereof. As such, 46% of Americans believe that they may not have enough money to sustain them in this portion of their lives, according to polling conducted by Gallup.

A more recent survey, released in February by the nonprofit foundation Life Happens, shows that fears regarding inadequate retirement preparation persist. It ranked as the No. 1 major life milestone concern in a poll of 2,000 adults. Inadequate retirement preparation was a bigger worry than buying a home, having children or getting married.

In addition to laying the foundation for a successful retirement and paying the premiums for life insurance this financial strategy addresses a number of other issues that may be important to your long-term business planning goals. They include the following:

  • Buy-sell arrangements
  • Group life insurance policy funding
  • Business succession
  • Deferred executive compensation
  • Key-person financing and retention

This last one – key-person financing – is particularly noteworthy. If you're a business owner, you may have a staff member or executive who is fundamental to your company's success and long-term growth. In short, they're irreplaceable. However, in the event they pass away, key-person financing helps to address the costs and losses that may be incurred by paying the death benefit to the company. It's an invaluable tool, and life insurance premium financing can supply you with it.

What makes insurance premium financing worth it?

Life is all about options; the more you have, the more you're able to do in terms of completing your goals and truly living your best life. This, more than anything else, is the true beauty of life insurance premium financing: It allows you to retain more control over how and when you use your money.

As a high net-worth individual, however, it's quite possible that you already have the capital to pay for life insurance premiums. So you may ask yourself, "If funding the premiums aren't an issue, why bother with borrowing?"

Once again, it all goes back to expanding your horizons. For example, even though you may have the money, it still requires you to commit those funds, which you may typically use for something else. Borrowed funds essentially help you kill two birds with one stone by paying the life insurance premiums and accompanying loan interest, while leaving your own money available for use in other productive purposes. These may include investments in business expansion, real estate, other businesses, etc.

How does premium financing a life insurance policy work?

So you know what life insurance premium financing is and why it's a smart strategy. But how, exactly, does this strategy work from a practical standpoint? Any life insurance agent will tell you that policies are highly customized. The same is true for loan arrangements; they're all unique in their own way.

That said, for the sake of simplicity, life insurance premium financing plansfor high net worth individuals break down into four parts

1. Once you apply and the loan is approved, an irrevocable life insurance trust, or ILIT, is set up.

2. The trust then borrows the funds from the lender to pay the premiums.

3. The lender is then repaid the loan balance, based usually on a simple interest structure

4. When the loan term sunsets, the borrower pays the remaining principal through funds that may or may not include some of the cash value of the policy.

For businesses, there is no ILIT formed, instead the business is the direct borrower, but the rest of the process is essentially the same.

In a nutshell, that's pretty much how it works. It is important to point out that you do need collateral to secure the loan. While the accrued value of the policy itself can typically be used as collateral, there may be additional collateral required. This again goes back to the fact that every policy is slightly different in construct and overall structure.

Who qualifies for premium financing?

Life insurance premium financing – and life insurance, in particular presents individuals and business owners with a resource-efficient way to provide protection and planning for eventualities in both the personal and the business sphere. While life insurance is something that everyone should get, the same can't be said for premium financing, mainly because it may not make sense depending on your financial or personal situation. Generally speaking, this strategy is ideal for high-net worth individuals. This means people whose investable assets run no less than $5 million. If you're in the medical field (e.g. physicians), legal (e.g. attorneys) or finance (e.g. data scientist), your profession may make you an ideal candidate for life insurance premium financing.

Other factors evaluated to determine eligibility include your credit history and any existing debts.

Nothing is more important than your family's well-being, both physically and financially. Global Financial Distributors is your go-to source for high-touch life insurance premium financing that can keep you and them protected for the long-term.

In these uncertain times, you can depend on GFD to effectively serve your wealth management needs. Contact us today to learn more.