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.
Financing your life insurance premiums can deliver benefits. It offers you the opportunity to:
- Death benefit payable to the ILIT should pass to the trust beneficiaries estate and income tax-free.
- Substantially reduce or eliminate gift tax cost associated with the client’s desired level of life insurance protection.
- Reduced net out-of-pocket cost for the life insurance.
- 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.
- 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.