Client Profile

• High net worth ($5 million or more for an individual)
• Life insurance need
• Favorable insurability
• Sophisticated investor with adequate liquidity available for collateral
• Minimum annual premium of $500K

Overview

• A cost effective method utilized by the affluent marketplace to pay for a life insurance need for a specific period of time. One has the ability to fund current and future life insurance premiums without hindering cash flow, financial position, or asset growth.
• A needed life insurance policy is obtained via borrowing premiums through a collateralized loan from a reputable lender. The policy cash value is pledged as the primary source of collateral on the loan. The client is then responsible for posting additional collateral for the remaining gap between the premium and the cash surrender value on an annual basis. Acceptable forms of collateral include cash, pledged securities, life insurance cash value of currently held policies, and/or a letter of credit. Should the insured(s)’ demise occur prior to the loan repayment, the outstanding loan would be repaid from the policy proceeds.

Areas of Planning where Premium Financing is Typically Used:

Estate Planning

• As part of an estate plan, a client can obtain a large amount of life insurance for the purpose of estate tax liquidity. Traditionally purchased in a trust, this offers gift tax protection because the client does not have to gift the premiums. If the interest is paid out-of-pocket, then the gift tax exclusion and lifetime exemptions can be used to offset the taxes due on the annual loan interest gifts.

What is the basic process?

• Speak with a Greco & O'Neal Wealth Strategies partner about your client to determine if premium financing would be a good option
• Greco & O'Neal Wealth Strategies will provide you with a premium financing proposal to review with your client -these are typically designed as short pay max funded policies
• Gather financials and medical records to begin the financial/medical underwriting processes. Typically medical underwriting is first obtained on an informal basis from a handful of carriers in order to determine which offers the best option for your client. Once the carrier has been chosen, a formal life application is then submitted and the final illustration is simultaneously submitted to the lender.
• Loan options are presented and typically a 5-10 year commitment is offered by the lender
• Once approved by the carrier and lender, collateral is posted, any required interest payments are made, and the policy premium is funded
• Simple annual reviews with the lender are required
• Accumulate significant cash in the policy quickly
• There are several options for satisfaction of the bank loan:
  • The loan can be paid out-of-pocket at any time, with most lenders waiving any prepayment penalties
  • A loan can be taken from the life policy to pay off the bank loan at a time when the policy can efficiently handle the withdrawal
  • Any combination of the above two scenarios can be incorporated
  • The policy owner is left with a fully paid-up policy that is cash rich

  This is a brief description of the potential benefits of premium financing. The process is complex and we recommend review of a full proposal and discussion with a partner who can walk you through each step.

  Risks/Concerns

  • Premium financing is not a means to obtain free or reduced cost life insurance. At a minimum, premium financing always adds the cost of interest on amounts borrowed to any life insurance purchase.
  • Financing life insurance premiums creates risks and costs. Adverse policy performance or increases in the premium loan rate may impact a client's ability to repay premium loans.
  • Borrowers should understand the potential tax (gift and income) implications of paying off premium loans.
  • Clients are advised to seek legal and tax advice to determine if premium financing is a viable option for them.

  What are the downsides of premium financing to fund needed life insurance?

  • Borrowing for insurance financing may reduce borrowing capacity for other opportunities. Drops in asset values may require the posting of additional collateral.
  • If collateral is unavailable, further credit may not be extended and the loan may be called.
  • In the long run, the overall costs of premium financing will be higher than paying premiums out-of-pocket. Lenders requirements plus the premium loan and the loan interest due may make this program uneconomical.
  • In an increasing interest rate environment, the cost of borrowing will be larger than originally projected. It may also cause the internal rate of return (IRR) on the policy death benefit to be significantly less than the IRR if premium financing was not used.
  • Accrual of loan interest can increase the loan liability dramatically. The interest accrual option should be entered into with caution. MassMutual® requires interest to be paid annually on premium financing arrangements for its policies.
  • Since dividends and other policy crediting amounts are not guaranteed, premium financing arrangements using dividend paying policies pose concerns. It is recommended that insureds and their financial professionals review a sensitivity analysis with a dividend of a ½ or 1 point below the current dividend scale.
  • Any leveraged strategy is based on current financial condition and needs. Those interested in premium financed insurance should work with a financial professional to continually re-evaluate the premium financing strategy to account for changes in circumstance.