John Hart, 66, and Mary, 64, need a last survivor life insurance policy with a $10 million death benefit for estate liquidity. The annual premium for the policy is $150,000 based on 10 annual payments to endow.

The Harts’ biggest liquid asset is their $2 million brokerage account, most of which contains mutual funds that have historically earned an average annual return of 10%.

Given the recent market volatility, the Harts are reluctant to convert any of their investment portfolio into cash, which would mean taking a loss and reducing their investments potential for growth. A sale of the assets within the portfolio could also result in an income tax liability for any gains the Harts may have enjoyed.

Knowing that the Harts need the life insurance policy to accomplish their wealth preservation goals, the couples broker recommends a premium financing arrangement. The financing arrangement makes sense as long as the Harts continue to earn more from their investment portfolio than they will have to pay in loan interest.

The premium financing arrangement requires the Harts pay interest on the loan for 10 years. They deposit the difference between what they would have paid in premium and what they are paying in loan interest in a side fund. After 10 years, the Harts retained capital is projected to accumulate to $1,561,002 assuming a 10% annual rate of return. The Harts then use the $1.56 million to pay off the loan at the beginning of the eleventh year.

The result is that the Harts are able to cover the costs of their estate liquidity needs with little or no impact on the current investment portfolio.

Mary Young


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 12, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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