Premium Finance for Death Benefit
Qualified high-net-worth individuals looking for large death benefit policies may benefit from premium finance to pay for the policies. As a unique financing opportunity for those who qualify, this can provide the large life insurance policy you need, without requiring sizeable monthly payments.
How does Premium Finance for Death Benefits Work?
High-net-worth individuals, who have most of their estate tied up in businesses and real estate, don’t always have an extensive amount of free liquidity. However, they still need to protect your estate with a large life insurance policy.
Premium finance is one way to secure a substantial life insurance policy, without paying hefty monthly premiums. With this type of financing, the lender accepts the policy as collateral. The borrower is only required to cover interest payments, rather than the entire premium. This frees up cash for the borrower and policyholder.
The premium loan is then repaid from the policy payout at the time of death.
Benefits of Premium Finance for Death Benefit
Premium finance for death benefit offers some individuals significant financial benefits. First, it provides qualified borrowers relief from dipping into cash reserves to pay monthly premiums. It also helps borrowers to avoid sales of assets such as real estate to pay the monthly premium on a large life insurance policy.
Thirdly, using this type of financing may enable the borrower to make better use of cash through more efficient investments. Lastly, using this type of financing to pay for a sizeable death benefit may help you avoid triggering capital gains taxes if you had to sell an asset to pay for your life insurance.
Risks of Borrowing for Death Benefit
There is at least some risk in all financial planning, including borrowing. Potential risks from borrowing to pay for life insurance premiums include the following:
- Possible rising interest rates
- Re-qualification risk at the time of loan renewal
- Failure of the death benefit to grow
- An underperformance of policy’s cash surrender value
Example Of Premium Finance for Life Insurance Premiums
Consider a married couple who require a $20 million life insurance policy to complete their estate planning. However, their yearly premium on a death benefit of this size runs more than $100,00 per year. Because their estate is largely made of illiquid assets, including businesses and investment properties, they do not have the cash reserves to comfortably make this payment each month.
Indeed, to make the premium payments, they would have to sell some of their assets. Instead, they apply for premium financing and are approved. They can easily make their interest payments; their death benefit is secured, and they didn’t have to liquidate assets. For this couple, premium financing made sense.
Is Premium Finance for Death Benefit Right for Me?
All financial and investment decisions should be thoroughly reviewed with your trusted advisors. Before deciding to finance your life insurance policy, consider your overall estate plan, consulting with the appropriate advisors, including your wealth management advisor, certified financial advisors, and your CPA. To schedule an appointment with Finley Davis to discuss strategies for your estate planning and death benefits, contact us today.
