A Premium Finance Option

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March 20, 2015

Imagine having a thriving family business that you would like to leave to your heirs. In your estate planning, however, you discover that your estate will be subject to a $10 million tax bill. The only way for your estate to pay this tax liability, in the absence of additional advance planning, may be to sell the family business you wish to pass on.


Or, maybe you want to leave your children a substantial piece of land. While you expect them to sell some of it to cover taxes, you don’t want them to be forced into a fire sale, where they have to take any offer just to liquidate as quickly as possible. Fortunately, there is another way to address these potential liabilities and liquidity needs.


Life insurance can be both a tax-efficient and cost-effective source of funds for addressing these issues. Many high net worth individuals use life insurance and trusts in their overall estate plan to help preserve their estate from tax liabilities and other expenses. To pay for these premiums, life insurance premium financing may be an attractive option, especially if there are other assets and tax considerations.

How It Works

Life insurance premium financing is a way to fund the premium payments associated with a large life insurance policy without significantly impacting current liquidity or cash flow. “It can work incredibly well in business estate planning, as well as for individuals who are charitably inclined,” says Carol Goetsch, Head of Insurance and Retirement Plans for U.S. Bancorp Investments, Inc., an affiliate of U.S. Bank.

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March 20, 2015

With financing, you are using the bank’s money, rather than your own, to carry the policy. “It can be more economical because it leaves your investments to continue generating a return,” says Steve Engel, Senior Wealth Strategist for The Private Client Reserve of U.S. Bank.


“This model may have dual financial benefits,” says Heather Leyde, Private Banker for The Private Client Reserve. “Financing premium payments to cover the cost of the insurance policy might negate the need for you to liquidate assets and thereby not incur taxes related to that sale. If the interest rate on the loan is less than the rate generated on the asset used as collateral, you can continue to generate a profit.”


In addition, premium financing allows individuals tomaximize and even leverage their annual gifting exclusions and lifetime exemptions. For example, an individual can apply gift money that would have been given to an heir to pay the interest on the premium financing loan. (An individual can gift $14,000 and a couple can gift $28,000 per year to each child/heir without having to pay an estate tax. 

An individual can gift $5.43 million and a couple can gift $10.86 million over their lifetime without estate tax liability).


Where to Begin

“The first step is to determine whether life insurance is needed as part of your estate plan, and if so, what type of insurance. The second would be to determine the right amount of insurance and how you will pay for the life insurance premium, as well as the payment manner that makes the most sense given your assets, goals and objectives,” Goetsch says.


While there are advantages to life insurance premium financing, there are also inherent risks that should be considered and managed appropriately. These risks include:  interest rate exposure, present and future collateral requirements, projected versus actual policy performance, financial renewing ability, financial condition changes and loan exit strategy viability. Your wealth management advisor, tax planner and insurance specialist can help you navigate these issues.

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March 20, 2015

Looking Ahead

After you have a plan, review that policy with your advisory team annually — and after any major life or financial change — to be sure that the amount is still adequate and that the financing model continues to make sense. Sound financial advice includes contingency planning, so it’s prudent to make sure you have an exit strategy. “The environment today is very good for premium financing tools because interest rates are so low, but if rates go up that could change,” Engel says.


If, for example, the rate of return on the asset becomes less than the interest payments on the

loan, the cost benefit value of premium financing may vanish. Or, you may simply find yourself in a more liquid place and realize paying off that loan early makes more sense than leaving it to your estate.


“While life insurance premium financing can be a good option in certain circumstances, you always want to have another plan to pay off debt,” Goetsch says.


For more information, see our Insurance Premium Finance INSIGHTS paper.


Please see important information below. 

Wealth Transfer