As a high net worth individual, you have a lot of responsibilities. Whether it’s to your family, your posterity, your community or your business, managing all these aspects of your life simultaneously — and with equal attention — is no small task. After an extraordinary past two years that have led to the loss of lives — and livelihoods — more people are getting back to the basics by prioritizing what’s important: those whom they love and those who love them. Proof positive of this fact is a renewed focus on life insurance.
As a joint poll from LIMRA and Life Happens found, 1 in 3 Americans said the effects of COVID-19 has persuaded them to obtain life insurance as soon as possible. Close to 1 in 4 respondents noted that they probably needed more coverage than they currently owned.
But as someone who likely requires a large life insurance policy — meaning more life insurance than the average individual — you may not have the funds available to purchase the amount of coverage you know is necessary.
Premium finance solutions may be able to help with that and establish the balance that you’re seeking to recapture.
What is premium financing all about?
Life insurance premium financing allows you to take out a loan to pay for life insurance premiums. Thus, instead of using your own funds, a third party specializing in premium finance makes them available to you so you can leave your money where it is.
“Life insurance premium financing allows you to take out a loan to pay for life insurance premiums.”
While the loan itself is structured differently, you can think of life insurance premium financing like you would if you were in the market for buying a house and you needed a mortgage. Just as the loan is what pays for the cost to buy that house, this type of financing serves as the vehicle that covers the life insurance premium.
One of the ways that life insurance premium financing is unique is how the loan is paid back. For example, since the policy you’ll be purchasing has cash value, which accrues tax-deferred interest, you can use those funds to pay off what you owe. So, in a way, the policy can wind up paying for itself.
Why do you need life insurance premium financing?
As a general rule, most things cost more than you anticipate, given economic realities and the fact that the cost of living typically goes only in one direction: up. Even as a high net worth individual, factors affecting your estate tax rate, and personal or business debts can leave you with limited discretionary spending.
The income tax structure in America is a progressive one – you pay a higher percentage the more that you earn. The same goes for the estate tax. While the average tax rate paid hovers around 17%, the top estate tax rate is approximately 40%, according to the non-profit organization Americans For Tax Fairness.
If you have assets valued at $5.3 million or more, you could be in this top bracket. Plus, there are also state estate taxes, and the tax threshold is often considerably lower than what it is for federal. Indeed, this is the case for at least a dozen states, including Connecticut, Oregon, Massachusetts and Illinois, according to the American College of Trust and Estate Counsel.
“60% of retirees point to Social Security as a major source of income.”
The vast majority of people don’t have to worry about estate taxes, but given your wealth status, life insurance premium financing can free up the funds that may be needed. Life insurance policies that are premium financed may be tax advantaged; beneficiaries may not need to pay any taxes on the distributions they receive. Also, depending on the structure of the initial loan arrangement you may be able to put the funds toward business or personal retirement planning strategies. It’s always best to overestimate how much it will cost to retire, as people frequently wind up relying more on certain sources of income than they initially anticipate. In a recent Gallup poll, less than 40% of respondents who had yet to retire but planned on doing so said they expected to be reliant on Social Security benefits in retirement. When current retirees were asked about Social Security, almost 60% said it was a major source of income for them.
Bottom line: There’s no such thing as too much retirement or estate planning preparation.
How is a life insurance premium financing plan structured?
Just as life insurance plans are customized according to the needs of the individual, the same goes for loan arrangements: They tend to vary considerably. Generally speaking, though, they break down in the following way:
1. For high net worth individuals, an irrevocable life insurance trust (or ILIT) is created, which borrows funds from a third-party lender to service the life insurance premiums. For businesses, the firm itself will borrow the funds from the third-party lender.
2. The insurance company issues the policy and the premiums are paid through the loan’s proceeds.
3. The borrower then repays the lender with interest and/or pledges additional collateral in the event that more is requested. Traditionally, the cash value of the policy constitutes a substantial portion of the assets pledged as collateral. There may be instances in which the lender needs more collateral.
4. Upon conclusion of the loan term, the borrower or ILIT can either extend the loan period or pay off the balance through the policy’s cash value or from other funding sources. If the cash value is short of the amount that is outstanding, more collateral may be needed. Acceptable forms of collateral include cash, government-issued securities, letters of credit by a certified financial institution, brokerage accounts or the cash value of a previously existing life insurance policy.
What are some of the other advantages of life insurance premium financing as a high net worth individual?
Given its title, life insurance premium financing is associated with life insurance, specifically universal life insurance. But it can be used for other business or individual planning purposes. For example, if you’re a business owner, you can obtain premium financing for key-person coverage (also known as key-man insurance). What would happen if you were to suddenly lose a valued member of your organization? While no one is fully replaceable, key-person insurance can make the process of finding a suitable fill-in more doable by affording you more time, something you may not otherwise have depending on how integral that person was to your organization’s profitability.
Premium financed life insurance can service the premiums of key person insurance coverage. It can also go toward:
- Business succession
- Deferred executive compensation
- Buy-sell arrangements
- Group life insurance funding
Speaking of group life insurance, more employers are offering it to their full-time workers. According to a recent report released by Gen Re, the number of businesses offering group life policies rose in 2020 compared to the previous year. Employees’ participating in these plans also climbed.
If you intend to offer life insurance, you’re in good company. Life insurance premium financing can turn your intentions into reality by taking care of the upfront cost charged by your insurer.
Instills greater peace of mind
If 2020 and 2021 proved anything, it’s the reality that you can never predict what will happen to you, your family, your business or the world at large. Who would have guessed that a pandemic would strike and affect literally every aspect of life? Nor could anyone have imagined the long-lasting repercussions.
“Life insurance premium financing can provide you with added peace of mind.”
The only guarantee in life is change, and whatever it ends up throwing at you in the coming years, life insurance premium financing can provide you with added peace of mind by allowing you to pivot and use your money however necessary when unexpected events arise.
No personal guarantee necessary
If you’re a business owner, life insurance premium financing typically does not require a personal guarantee. This is one of the many reasons why more people choose Global Financial Distributors for life insurance premium financing; we specialize in flexibility and affordability.
From wealth planning to leveraging it as working capital to interest rate flexibility, life insurance premium financing has many benefits and can give you or your affluent clients the resources to take care of the affairs that truly matter. For more information on anything pertaining to premium financing – including death benefits, collateral, the loan process and how it can help with key person insurance – don’t hesitate to contact us at Global Financial Distributors.