Americans, by and large, understand the importance of life insurance. This is particularly true of high net worth individuals. Generally defined as those with investable assets between at least $5 and $10 million, high net worth people have many responsibilities and assets that require financial protection. Diverting resources to pay for the premiums, while possible, is rarely ideal.
That’s where premium financing can offer a lending hand. Here’s a brief breakdown of financing for life insurance and why it may be the right move for your high net worth client:
What is life insurance premium financing?
Life insurance premium financing is an arrangement that allows high net worth individuals to borrow money from a lender in order to pay for the proceeds of a high-value life insurance policy. As surveys from LIMRA show, many Americans overestimate how much it costs to buy coverage, so they’re pleasantly surprised when they do. But for high net worth individuals, life insurance premiums can cost tens, if not hundreds of thousands of dollars. Paying the premium upfront – or in installments – can be a tough ask when that money is already in use in other capacities.
Life insurance premiums financing resolves this through borrowed funds and holding the policy in an irrevocable life insurance trust, or ILIT. As noted by Wealth Management.com, this ensures that the death benefit and cash value goes to the beneficiaries of the policy estate-tax free.
Here are some characteristics of the ideal life insurance premium financing candidate, outlined by the Forbes Finance Council:
- Individual requires a large amount of life insurance protection to help with estate planning.
- Has the ability but doesn’t want to use his or her existing capital to pay the premiums.
- Policyholder fits the approval qualifications established by the underwriter.
- Has a combined net worth (i.e. defined assets – liabilities = net worth) of at least $5 million.
What’s the payoff?
The benefits to premium financing are numerous, which is why it’s such a popular arrangement. Perhaps the biggest of them all is it allows the policyholder to obtain life insurance without spending what they would normally pay out of pocket. Those unused funds can then remain where they are or be invested in a financial product that offers a high rate of return.
Another perk is the tax break. The ILIT helps the policy avoid estate taxes so beneficiaries get the full value of the policy’s proceeds, which can accrue over time through interest. In fact, premium financing may provide lifetime income, and the loan doesn’t need to be paid back until it generates enough surplus cash value.
Leveraged Planning® Solutions may be just the arrangement for your high net worth client. For more on what makes Leveraged Planning unique, speak to a GFD representative.