• Premium Financed Life Insurance

  • LIFE INSURANCE PREMIUM FINANCING

    WHAT IT IS

    Essentially, premium financing is borrowing money to pay life insurance premiums. This means assuming debt which many individuals are unwilling, or at least reluctant, to do. There are many options available and it is possible that borrowing funds may be less expensive than paying the life premiums outright. All options should be explored and it may be that even if the total financial outlay is greater, borrowing the funds may still be a cost-effective and appropriate strategy.

    HOW IT WORKS

    The processing of a premium financing case can become very complex but the concept is quite simple. It is important to have an experienced financial advisor i.e. Mott Tax Advisory Services work with tax and legal advisors to insure the best package is crafted for the client.

    Premium financing cases are as varied as the individuals who apply for them and as a result of competition, arrangements are custom tailored. However, all cases do have two components: (1) applying and obtaining life insurance and (2) applying and obtaining the necessary funds to pay the life insurance premiums.

    THE CANDIDATE

    The premium financing strategy attempts to address the needs of business and estate planning clients who are knowledgeable in financial matters and are willing "to think outside the box." It aids those clients who are reluctant to liquidate equities or real estate to pay life insurance premiums however, recognize a need for life insurance and are insistent on meeting that need.

    TYPES OF PREMIUM FINANCING

    Interest Only – the client pays the interest only, either in advance or in arrears – to the lender for use of the funds. The loan is the amount of the premiums only. In a properly designed and funded policy, cash-value distributions may cover the interest payments.

    Interest Accumulated – the interest on the loan principal is added to the total cost of the loan and is paid out when the death benefit is paid.

    IMPORTANT ISSUES

    There are a number of key issues to consider before employing a premium financing arrangement. A complete review of all relevant issues must be done and the Mott Tax Advisory Services staff is experienced in doing just that. For example:

    Interest Rates and Loan Structure – the rates and loan specifics can vary considerably by lender. Generally, larger loans have lower rates and smaller loans have higher rates. But there are exceptions. In addition, lenders are prone to charge a loan origination fee or other fees that will increase the total cost of borrowing.

    Financing Options – as previously noted, premium financing is comprised of two parts: life insurance and a loan. There are many life insurance carriers and a multitude of life products to choose from. Likewise, there are a number of lenders. Thus, there are many avenues to "shop" cases to insure the best deal for the client.

    Collateral – this is critical in premium financing and there are a number of variations depending on the lender. Two key issues are the amount of funds being borrowed and the value of the assets used for collateral. One lenders value of an asset is not necessarily another lenders value.

    Life Product – most life insurance products will be acceptable for premium financing but there are exceptions. The life product should be approved before the premium financing process is initiated.

    Tax Implications – premium financing has tax implications in a number of areas – estate, gift, income. Tax advisors should be consulted.

    Premium financing is a highly competitive, ever-changing field and it is critically important that an experienced firm/individual coordinate the process. Mott Tax Advisory Services has performed most capably in that role.