First of all, in the following article we will explain premium financing whole life insurance.
If all you want is a quote, contact us at [email protected] or leave us a comment. Here are the topics you will learn in this article:
- What is Premium Financing?
- Where is Premium Financing Used?
- Premium Financing with Whole Life Insurance
- Process of Getting a Premium Financed Policy
- Pros and Cons of Premium Financing
What is Premium Financing?
Life Insurance Premium financing is a way to fund life insurance with a loan from a bank. The bank loan pays the life insurance premiums for a defined period of time and then the policy becomes paid up (no more premiums). Typically, you will use your life insurance to pay for estate taxes. The owner of the policy will still have to pay for the interest on the loan, instead of the premium, which offers significant leverage.
In order to have security, banks ask for collateral on the loan, which helps to keep the interests on the loan low. After a period of time, you will have to pay back the loan to the bank. Usually, you will pay it back with the cash value inside of the life insurance policy. The time frame to commonly is 10 or 11 years where you will pay back the loan.
After the loan is paid back the client keeps the remaining life insurance for the rest of their life, without having to pay more premiums.
Where is Premium Financing Used?
The most common usage of premium financing is to pay for Estate Taxes. You establish a Trust, and The life insurance is held in this Trust (Irrevocable Life Insurance Trust). Then your life insurance will be outside of your Estate. Which means you will not have to pay for estate taxes on that portion.
At death, the life insurance is used to pay for the estate taxes remaining, and heir of the estate remain in control of all of the assets.
Let’s illustrate a common example.
Problem: A client 45 years old is worth 20 million dollars. If he were to pass away he wouldn’t pay estate taxes on the first 5.3 million (depending on where you reside this number changes), the rest of the $14.7 million would be subject to estate taxes.
The tax rate would be approximately 40% of the 14.7 million, so about $5.88 million goes to the IRS. That is a significant tax that will go to the IRS.
However, make sure that you talk to an estate attorney to plan out your trust and estate taxes properly.
In cases like the previous example, you could use life insurance to pay for estate taxes.
Premium Financing With Whole Life Insurance
One of the most efficient ways to transfer money is life insurance. However, there are many different types of life insurance like term, universal or whole life.
One of the most common types of life insurance used for premium financing is whole life insurance.
The reason is that you want to make sure that the life insurance you use has guarantees that cover you for the rest of your life.
When you die the life insurance will be used to pay for Estate Taxes. It can also offer significant growth on the death benefit the longer you maintain the life insurance.
The question is how much does it cost the client to get the life insurance?
To get premium financing costs please contact us, and we can run the numbers. However the interest on the loan will depend on the current interest rate environment, and what the bank approves your loan at.
If you want to know what company you should use we would recommend you read our article on the best whole life insurance for cash value.
Premium Financing With Universal Life Insurance
Another way to do premium financing is using universal life insurance. The most common universal life for premium financing nowadays is an Indexed Universal Life (IUL).
The reason clients and some banks like IUL’s is because it offers upside potential from the market, but it limits the downside risk to the minimum “floor”.
To understand the differences better please read our article: IUL vs Whole Life.
When using am IUL you have to be very careful after you have paid back the loan from the bank. Because now you will have a large loan on your IUL, and if the market doesn’t perform according to plan then you will be in trouble.
Be careful if someone showed you IUL’s with very high rates of returns on the illustrations. Most banks will make sure you are not over-leveraged, but it’s important you cover yourself first.
Process of Getting a Premium Financed Policy
In reality, the process can be quite simple if you use experts on premium financing. Here are the steps:
- Define how much death benefit you need to cover your estate taxes.
- Compare different whole life insurance quotes to get the best one for you.
- Get a pre-approval from a bank for the premium loan.
- Create a trust (ILIT) with an estate attorney
- Apply for life insurance.
- Once you have been approved, you can use the loan to pay for your premium.
There are more details to each step, but we want you to have an idea of how the process works.
Pros and Cons of Premium Financing
- It creates great leverage of assets when used properly.
- It will not require much upfront capital to get the death benefit.
- The internal rates of return on the death benefit could be more than 10% in many cases.
- You will not count your life insurance in your estate.
- There is a minimum asset requirement from the bank
- If interest goes up, you will have to pay more interest on the loan.
- You can have your loan called back by the bank. Which means you will have to use your assets to pay the loan back.
Premium Financing Banks
Finding banks that do premium financing is not an easy task. As a matter of fact, we recommend always talking to an expert agent first. Then the agent will recommend a bank that the insurance company will approve. This way you get the best life insurance product first, and then find a bank.
We have used life insurance premium financing banks in the past like:
Life Insurance Premium Financing can be a fantastic way to pay for estate taxes. In reality, you can leverage your money very efficiently, while your money is still working for you.
This article is meant as a simple explanation of life insurance premium financing. If you have any questions please leave a comment or contact us directly.
We will be happy to provide you a Free Quote.