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What is Premium Financing?

Schechter Wealth

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August 11, 2016

Life insurance premium financing is a strategy intended to help clients obtain life insurance for which they have an established need. Typically, premium financing is a fair market loan arrangement between a commercial lender and an irrevocable life insurance trust (ILIT) where the lender loans the premiums for a life insurance policy on the client’s life to the ILIT.* In that case, the gift to the ILIT is equal to the amount of loan interest charged — not the entire policy premiums. As a result, the client is able to acquire the death benefit needed with little or no gift tax impact.

Who Should Consider Premium Financing?

  • Individuals, corporations, trusts, or partnerships with a need for a significant amount of life insurance and assets to protect and invest.
  • Clients who value choice, flexibility, and the potential to maximize the purchase of life insurance.

Potential Benefits

Financing your life insurance premiums can deliver benefits.  It offers you the opportunity to:

  1. Death benefit payable to the ILIT should pass to the trust beneficiaries estate and income tax-free.
  2. Substantially reduce or eliminate gift tax cost associated with the client’s desired level of life insurance protection.
  3. Reduced net out-of-pocket cost for the life insurance.
  4. Minimal or no impact on the current investment portfolio; client maintains control and use over assets that otherwise would have been liquidated to pay life premiums.
  5. Potential to leverage the client’s investment portfolio when the portfolio returns are higher than the cost of the loan.

 

*Trusts should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws (including generation-skipping tax). Failure to do so could result in adverse tax treatment of trust proceeds.