LIFE INSURANCE OPTIONS FOR
HIGH NET WORTH CLIENTS
If your client has a net worth of over $5 million, they may need more life insurance coverage than most people, and may have the option to
finance their premiums. Why would they choose to financing premiums?
The idea of financing is not new. They may have purchased real estate, a business, or another significant asset using financing.
Here are some reasons financing life insurance may be a viable idea for them:
They may not want to liquidate meaningful assets to make premium payments.
Current cash flow may be already committed to other expenses.
Financing can provide gift-tax leverage (loans made to their Irrevocable Life Insurance Trust to pay premiums are not subject
to gift tax).
Financing may allow for the purchase of a large life
insurance policy at a lower out of pocket cost when compared to paying premiums directly.
ARE THERE ANY RISKS ASSOCIATED WITH PREMIUM FINANCING TO CONSIDER?
In addition to the potential benefits, there are also significant risks associated with premium financing that need to be considered before implementing the strategy. Risks associated with premium finance include:
Interest rate risk - Increases in the interest rate on loans used to finance the premium payments may lead to higher interest costs than anticipated and may require additional collateral to be posted.
Policy crediting rate risk - The amount of interest credited to the policy will vary, and if the amount credited is less than projected, that may require additional collateral to be posted, or delay the repayment of the loan from policy values.
Collateral call risk - Should the value of collateral posted fall below that required by the lender, there may be additional collateral that needs to be posted. Additionally, should the loan default, any supplemental collateral that has been posted to secure the loan could be called to repay the loan in addition to the cash value of the policy.
Understanding these risks and monitoring the policy performance and interest rate environment may help mitigate these issues and they can act quickly to address any changes needed to their program.
WHAT ARE THE NEXT STEPS?
Using premium finance to pay for part or all of the premiums on a permanent life insurance policy may be an appropriate funding solution for high net worth individuals and businesses. A complete review of their situation which includes understanding what they want to accomplish, the types of assets they have, their risk tolerance and cash flow availability is a critical next step in moving forward with a premium finance program. Contact John in our Life Department to walk through a client situation using software that can show options for life insurance both with and without financing so you can see it in action: 800-524-1774.