Terry Bork
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Premium Financing—Leveraging Your Assets

If you are a high net worth or high income individual who seeks to make large premium deposits into a life insurance contract, but have most of your wealth tied up in business interests or investments that are unavailable for premium payments, Premium Financing can be a solution.

Premium Financing is for people who:

  • Have a net worth of $5 million or more, or an income of $1 million or more
  • Have a desire to make significant premium deposits into life insurance
  • Have a mix of assets that is not liquid, and is unavailable for premium deposits
  • Lack the disposable income required to make desired premium deposits
  • Understand and appreciate leverage and interest rate risks

The Potential Benefits of Premium Financing

  • Ability to make large premium deposits without liquidating assets
  • Interest payments are less than premium payments, reducing cash flow requirements
  • Strategy can cover multiple policies
  • By borrowing premiums, you can avoid immediate capital gains from liquidating assets to pay premiums
  • Leveraging can increase the IRR on cash value and death benefit
  • Borrowing premiums can free up assets and income to be used for other purposes

Additional Considerations

  • Because the lender’s interest rates are usually adjustable, Premium Financing involves interest rate risk
  • Cash value in the life insurance policy may fluctuate, and require additional future premium deposits
  • Interest on policy loans used to purchase personal life insurance does not qualify for an income tax deduction
  • Additional collateral, besides policy cash value, may be required to secure the loan, and could need to be liquidated to pay off the loan balance
  • Liquidation of collateral could cause adverse tax consequences

How Premium Financing Works

  • Premium Financing is similar to a line of credit.  A commercial bank lends funds that are used to pay premiums on the policy
  • Premium Financing requires ‘pledging’ assets as collateral to borrow the funds that pay the premiums
  • The loan is paid back based on the terms agreed to within the loan contract, using the policy’s cash value, death benefit, or other assets

Let’s discuss whether premium financing is right for you

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