Premium Financing is the borrowing of money from a bank or financial institution to pay for the premiums of a life insurance policy. Premium Financing involves the following parties: a person, a trust/business, and a bank/financial institution. The “person” is the measuring life for the life insurance policy. The “trust or business” is the insured that purchases the life insurance policy on the person’s life. The “bank or financial institution” lends the money required to pay the premiums for the life insurance policy. Premium Financing is attractive for individuals who are either (1) high-net-worth or (2) require large insurance policies.
Why Use Premium Financing?
Premium Financing is an ideal method for individuals who:
- currently cannot afford the premium payments;
- do not want to expend his or her liquid assets; or
- do not want to liquidate assets that are highly productive.
What Benefits does Premium Financing Offer?
Premium Financing can help with estate tax and provide asset protection.
How does Premium Financing help with Estate Tax?
Estate Taxes are owed to the Federal Government for estates exceeding the estate tax exclusion. In order to plan around the estate tax, individuals may utilize various techniques to move assets out of his or her estate, such as funding a business or gifting assets to a trust. If assets are no longer included in a high-net-worth individual’s estate, then the high-net-worth individual’s estate could be reduced below or equal to the applicable federal estate tax exclusion. Essentially, he or she could avoid the estate tax altogether.
How does Premium Financing provide Asset Protection?
Premium Financing can decrease an individual’s attractiveness to his or her potential or current creditors in two ways. First, a person’s assets that are funded to a business or gifted to a trust would no longer be included in that person’s estate. If assets are not included in a person’s estate, creditors and/or a bankruptcy trustee cannot attach or seize those assets. Second, a person’s exposed assets can be protected by properly utilizing liens. Typically, a bank or financial institution will require collateral before issuing the money necessary to pay the premiums on a life insurance policy. These liens are referred to as “friendly liens” because you are purposely and voluntarily permitting these liens by creditors who understand your intent. These liens are great for “equity stripping” assets that normally cannot be protected (i.e., personal home or cars).
Premium Financing is not for everyone. That said, Premium Financing is a powerful tool that can increase cash flow, mitigate risks, and protect assets. Further, Premium Financing can help business owners infuse capital back into his/her business if structured correctly. If Premium Financing is something you are interested in pursuing, please discuss with an attorney and life insurance agent. Below is a sample depiction.
If you want to learn more about Premium Financing, please contact our office for a free consultation. 949.591.8755