Are you familiar with premium financing of life insurance? Life insurance is often misunderstood by many financial professionals who underestimate its value as a powerful component of estate planning for the wealthy. A recent Forbes article highlights not only life insurance’s living benefits to cover estate tax debt (among other advantages), it also features a little-known strategy to actually pay for the life insurance, known as premium financing. Ironically, it has become a perfect solution for the uber rich. The concept is rather simple; the life insurance buyer borrows from a lender who puts up the money to purchase the policy. The borrower later has to pay back the loan with interest… but it’s still a win/win because of the potential tax-free growth of the cash value inside the life insurance policy. That windfall could be used to cover those costs.
It is a brilliant way to create leverage not only for the purchase of life insurance but to also super-charge the living benefits and tax-advantaged returns today. However, it is not a one-size-fits-all solution. There are numerous approaches, products, lenders, structures, and subjective opinions on premium financing. There are ways of building the interest into the loan…. or even using the policy to collateralize the loan. All approaches are worthy of careful consideration— particularly some of the downsides, exit strategies, future economic potential, as well as changes in personal circumstances.
The bottom line is that for the super wealthy entrepreneur the real question is not whether you can get a loan to pay for your life insurance, it’s whether or not you need one to provide more robust tax benefits. The strategies lean towards the more affluent and sophisticated clients where it can truly be a boon. The approach we favor is to furnish the client with long range predictability, and conservative projections. It’s not a set-it-and-forget it formula but one that requires close attention and expert advice.
The Forbes article quoted a recent survey that found that “of 262 successful entrepreneurs, only a few more than one in ten of them are using this strategy to purchase life insurance.” Why? Because it’s not right for every client, but the overwhelming reason cited: “In a study of 803 financial advisors, while two-fifths of them say they are knowledgeable about financing life insurance, less than then five percent have done a premium financed life insurance transaction with a client.”
That’s where experience counts, and our partnerships with knowledgeable Financial Advisors with expertise in this strategy makes the difference. Premium financing might not be right for every client but it can be ideal for a wealthy individual who has much to gain with very little risk.