A powerful tool for your estate planning consideration
For high-net-worth individuals, life insurance premium financing is a strategy that deserves your serious consideration. By borrowing the funds to pay for the insurance premiums, you may be able to maximize the benefits of the life insurance policy, for both you and your heirs, and at the same time minimize your tax liability, while leaving in place your current investment strategy.
A life insurance policy with a substantial death benefit is a valuable component of your estate plan. The premiums associated with such a plan, though, can be costly. You may need to liquidate investments to cover the cost, potentially exposing yourself to gift or capital gains taxes and reducing your ability to take advantage of growth in your investment portfolio.
Life insurance benefits pass to your heirs tax-free, not included in your gross taxable estate. And financing the premiums can allow you to keep your capital at work growing your asset base, while taking advantage of today’s favorable interest rates for the loan.
Financing the premiums through a bank or financial institution lets you preserve your current cashflow, avoid liquidating your current investments, and leverage your wealth to attain your long-term goals. Keep the funds you would spend on self-paying life insurance premiums in investments that yield more profitable returns.
If you have assets generating favorable rates of return, the difference between what you earn and the interest on the insurance premium loan can create an ongoing opportunity for appreciation. At the same time, you avoid the need to liquidate assets to pay insurance premiums that can reach or exceed six figures, the sale of which might trigger the payment of capital gains taxes.
In today’s low-interest-rate environment, creating the proper finance credit structure also presents the opportunity to lock in interest rates, for as long as 10 years.
As the old insurance company ads used to proclaim, “Life insurance isn’t for the one who dies. It’s for the ones who live.” Life insurance is a valuable component for your financial planning, helping to ensure that your loved ones are cared for, but the sizable policy required to meet your objectives will require substantial premiums, and careful planning to maximize the benefits.
The tax code is complex, and each client’s situation is unique. Premium financing is potentially valuable for individuals with a net worth of $5 million or higher, trusts, corporations or partnerships with a desire or a need for a significant amount of life insurance, individuals who, given the illiquid nature of their estate, may not have the cash on hand to pay significant life insurance premiums, and those looking to create a future tax-free income stream.
Trying to determine the optimum approach can be a complex and challenging undertaking, with the policy type and amount, ownership of the policy, and payment options based on your individual needs. While premium financing may be the right strategy for you, you need to look at the costs and benefits, and consider if you would be better served by paying the insurance premiums outright.
Life insurance premium financing can be invaluable, not only for affluent individuals, but also for business situations including buy/sell agreements, key-man insurance, executive benefits and company-owned life insurance, and can be applied to in-force as well as new policies.
To evaluate whether premium financing is right for you, you need to work with a knowledgeable team of investment professionals, experts who are qualified to consider the big picture of your individual circumstances. Life insurance premium financing cannot and should not be considered in a vacuum, but must be evaluated as a component of your overall financial plan. To achieve the results you desire, this plan must be a dynamic document, adapting as needed to changes in your personal financial picture or the overall economy. On your behalf, your advisors should explore vehicles including dynasty trusts, irrevocable life insurance trusts, charitable remainder trusts, and qualified personal residence trusts.
In working with highly successful clients, Generational Strategies LLC president and CEO Chris T. Christensen has continually stressed that it’s not enough to make a plan. He encourages audiences and clients throughout the country to constantly monitor and update their financial and estate plans, to ensure they offer maximum protection in an ever-changing environment.