Premium Financing is the borrowing of funds from a financial institution for the purpose of funding a life insurance contract. The borrower may be an individual, a trust, or a business. The primary benefit of premium finance is the ability to obtain large amounts of life insurance coverage without liquidating other assets. For many clients, it offers a tax-efficient way to fund a trust owned life insurance policy. Properly structured, a premium finance strategy can minimize gift and other associated transfer taxes, while creating an enduring legacy.
One of the more powerful reasons to consider premium finance is the arbitrage that may exist between the rate at which one may borrow and the rate of return that can be achieved on retained assets. Consider the following example:
Mr. Smith is the owner of a successful business. In conversations with his professional advisors, he has been advised that he should consider $10 million of permanent life insurance. Mr. Smith would prefer to keep the cash that would be used for premiums as his working capital inside his business. Working with a lending institution, he learns that he may be able to borrow funds with an interest rate that is considerably lower than the rate of return Mr. Smith is achieving through the growth of the value of his business. For Mr. Smith, premium finance may offer a compelling funding alternative to paying premiums out of pocket.
Lenders offer a variety of programs that fit many situations. When considering premium finance, it is important to work with an experienced life insurance professional who can help evaluate various alternatives and design a strategy that achieves a positive outcome since this type of financing transaction is not suitable for everyone.