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Life Insurance Premium Financing Brochure

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Life insurance premium financing
Adding a borrowing strategy to your estate plans can protect your heirs in the future—and your financial position today
For the executors of your estate, paying the death taxes due may precipitate a liquidity crisis—forcing an untimely sale of assets
that would otherwise be inherited by your intended beneficiaries, or resulting in other undesired outcomes.
A WAY TO PLAN FOR ESTATE TAXES
One way to protect future heirs is to insure
your life so that, at your passing, estate taxes
can be paid with the proceeds from a highvalue life insurance policy. Typically, in such
arrangements, the policy is held separate from
the rest of the estate, in a trust.1
An insurance policy can directly benefit your
heirs and other beneficiaries. The proceeds of
the policy can be used to:
This approach has the added benefit of being
tax efficient: The funds that the trust borrows to
pay the annual premiums and interest expenses
generally are available free of gift taxes.
MANY WAYS TO POTENTIALLY BENEFIT
• Cover estate taxes and thereby avoid
liquidating assets or disrupting an
investment portfolio
Financing the cost of a high-value insurance
policy can benefit you and ultimately your
estate in many ways, now and in the future, by
allowing you to:
• Retain control of significant or illiquid
assets, such as a concentrated stock
position
• Maximize insurance coverage without
adversely affecting your current cash
flow (or lifestyle)
• Provide funds to sustain a business
WHY BORROW?
Not surprisingly, putting such protection in
place comes at a significant cost, in the form of
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annual policy premiums. As a result, many
clients elect to finance those costs with a loan
collateralized by the cash surrender value of
the policy, in addition to marketable securities.
• Avoid having to sell assets—and
potentially triggering a taxable event—
to cover the cost of the premiums
• Gain access to liquidity at an interest
rate that is often less expensive
than a “policy loan”
A “carry” opportunity may exist as well: If the
interest rate charged on the loan is lower than
the rate of return earned on the cash value of
the policy, there may be potential appreciation.
CONSIDERATIONS
There are risks inherent in any borrowing
strategy. These include interest rate
fluctuation, market volatility and the possibility
of collateral shortfall, which may lead to a
margin call.
Before deciding whether to finance the
acquisition of high-value life insurance by
borrowing, we encourage you to discuss your
objectives with your team as well as with your
legal and tax advisors.
• Allow investments within the policy to
grow free of income taxes
Trust should be trusteed with an independent, non-subordinated party to avoid exposure to insurance contract indirect “incidences of ownership” rules set forth under IRS Sec. 2042.
LIFE INSURANCE PREMIUM FINANCING
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How it works Premium financing can help you maximize wealth passed to your heirs.
Bank advances
the funds to the trust
to cover the annual insurance
premiums and interest
on the loan.
You
Collateral (and
Guarantee)
#BOL
Beneficiaries
Pursuant to the terms of the trust,
the assets, less the loan repayment amount,
are distributed to your beneficiaries free of
estate and income taxes.
Loan
Premiums
Trust
Collateral
Assignment
In the early years of the policy,
before the policy’s cash value
accrues, you pledge additional
collateral to support the loan.
Life Insurance
Contract
Life
Insurance
Company
Trust repays the loan as the
cash value accrues, or you
repay with personal assets.2
LOAN STRUCTURE
General guidelines for eligible clients
BORROWER
• Typically, an Irrevocable Life Insurance Trust (ILIT)
GUARANTOR
• May be required (typically, the insured or grantor of the ILIT)3
FACILITY TYPE
AND TENOR
• Line of credit with maturities up to five years
• Interest-only loan—principal due at maturity4
COLLATERAL
• Loans are secured by the guaranteed net cash surrender value of the policy; additional liquid assets pledged as required3
• Premium financing can be used with Whole Life, Universal Life or Indexed Universal Life policies with a guaranteed net
cash surrender value of at least $500,000
• Requires the insurance carrier you select to have an S&P or Moody’s claims-paying rating of “A” or better
LENDING VALUES
• Loan-to-value ratio of up to 95% is available and is based on the guaranteed net cash surrender value of the policy
BASE RATE
OPTIONS
• Daily 1-month LIBOR (variable rate)
• Fixed LIBOR for 1-, 2- and 3-month maturities
DOCUMENTATION
• Financial disclosure is required upon application and over the term of the loan
• Loan documents, which may include covenants, prepared by legal counsel at borrower’s expense
• Life insurance illustration, including all contemplated riders
• Insurance policy or declarations page (if existing policy)
Consider tax implications for payments outside the trust.
If the insured or grantor posts collateral or provides a guarantee, there may be gift tax implications unless they are paid an arms-length fee for contingent use of their credit.
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Interest payments are typically made as a taxable gift or capitalization of interest, if available. Borrowers may not be able to deduct interest on the loan, as the proceeds are used
to purchase life insurance (Section 264 of the Internal Revenue Code). Clients should consult with their tax advisors for guidance on this matter.
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