Premium Financing Arrangements Help When Clients Object To Big Premiums

Solving complex estate and business planning problems often requires you to overcome a multitude of obstacles, challenges and objections, not the least of which is the cost of the life insurance policy your clients need to put their plans in motion.

How often have you discovered that your clients are reluctant to part with enough cash to actually pay for the life insurance policy and complete the planning process?

These clients fully appreciate the need for life insurance, especially if they have a large, illiquid estate. But concerns about the potential for lost investment income or, in some cases, increased tax liabilities, override their sense of urgency to take prudent planning steps.

Fortunately, there is a way to overcome these objections and help your clients complete their long-term life insurance planning in the process. Your clients may be able to satisfy all of their estate liquidity needs through the use of premium financing, an innovative financial strategy that allows them to leverage their savings and investments to pay life insurance premiums without having to liquidate those assets.

Premium financing arrangements are becoming more popular, especially with high net worth clients who have substantial investment portfolios.

Premium financing allows your clients to finance their life insurance premiums with dollars from a third-party lender. The cash for the premiums is borrowed from a private lender, which typically has a relationship with your clients’ life insurer and therefore may be able to offer attractive interest rates. By taking this approach, your clients can reduce their out-of-pocket costs for their life insurance coverage, keep their investment portfolios intact, enjoy attractive interest rates on the money they borrow, and effectively minimize gift taxes.

In a traditional funding arrangement for estate liquidity purposes, your clients typically use after-tax dollarsoften withdrawn from a personal investment portfolio or businessto pay for a life insurance policy owned by an irrevocable life insurance trust.

This creates two potential problems for some clients: 1) tapping investment assets to pay life insurance premiums can potentially reduce investment gains, and 2) the premium payments are considered gifts to the ILIT and may be subject to gift taxes.

A premium financing arrangement helps solve both of those problems. The cash needed to pay the life insurance premiums is borrowed from a third-party lender, leaving your clients investment portfolios untouched. The borrowed money is used to pay the life insurance premiums and the interest for the loan is typically paid annually. The loans principal may be repaid over time, or at the death of the insured.