Third Party Financing of Life Insurance Policies - When to Use This Wealth Preservation Strategy to Save Cash

October 2, 2019

Financing your lifeinsurance premium is an advanced strategy where the life insurance purchaserborrows money to pay the premiums rather than using up current liquidity. Thelender is later repaid the premiums from the death benefit. During times of lowinterest rates, this forecasting that the performance of the policy willoutpace the interest of the loan is usually correct.

The insurancecompanies have constructed specific products for these financed plans tominimize outside collateral and maximize returns. This allows individuals andbusinesses to leverage current assets, maximizing returns via a predeterminedcash flow.

This typically occursin the following manner:

1. The purchaserdetermines his life insurance needs.

2. Several plans areresearched until the purchaser determines which plan best fits his needs,accomplishes his goals and remains in his budget.

3. Formal bank andinsurance carrier underwriting is initiated.

4. The policy isissued by the insurance carrier. It is strongly recommended that the strategyis initiated inside of an Irrevocable Life Insurance Trust (ILIT).

5. The purchaser provides collateral for the insurance loan - usuallycomprised of policy cash value. The lender pays the life insurance premiums tothe insurance company.

6. The lender is repaid with the death benefits.

This strategy is not available to everyone. Premium financing isreserved for qualified clients, typically those with a net worth in excess of$5 million.

The obvious benefits of this strategy include:

  • Reducing oreliminating the out-of-pocket cost of the life insurance.
  • An opportunity tooutperform the lending costs.
  • Possibly allowing thepurchaser to obtain more life insurance than if the client paid the premiumsout of pocket resulting in more death benefits.
  • Reducing oreliminating gift taxes.

With any wealth management strategy, it is important to consult with an experienced financial advisor in conjunction with your estate planning attorney. Contact Stouffer Legal At 443-470-3599 in the Greater Baltimore area for more information on wealth preservation strategies.

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