High-net worth individuals need life insurance. It protects your assets, but the premiums can be high. If your assets are tied up in illiquid investments or you don’t want to give up all your capital to cover the high premiums of life insurance for high-net-worth individuals, you can use commercial premium financing.
With commercial premium financing, you can finance your insurance premiums with a third-party lender. You don’t have to worry about paying the premiums – the lender covers them for you. This only works if you meet specific requirements, though.
Premium financing can also help with needed liquidity upon your death. Not only can it cover estate taxes but it also provides funding for transfer of business assets.
It also provides a death benefit and can complement any estate plan. But insurance premiums can be expensive. In addition you may need to sell certain illiquid investments to cover the costs. This could expose yourself to capital gains or other tax issues which would reduce your ability to take advantage of your investment portfolio growth.
However there is a solution to this problem. By borrowing money to pay the insurance premiums you can support a large life insurance policy while minimizing taxes and leaving your investment strategy in place.
What is Commercial Premium Financing?
Commercial premium financing helps high net worth individuals have the life insurance coverage they need without worrying about the premium payments. The money needed to cover the premiums is borrowed from a lender, allowing you to leave your investment portfolio and even liquid assets untouched.
The lender pays your premiums as long as you continue to qualify for the loan.
Who is Eligible for Commercial Premium Financing?
Commercial premium financing is only for high-net-worth individuals. To be eligible for commercial premium financing, you must meet the following requirements:
· The annual premium on your life insurance must be $100,000 or higher · Your net worth must be at least $5,000,000 · You must have the required collateral · You must borrow in an entity’s name, not your individual name
What Credit is Required to Qualify?
The type of credit required to qualify depends on the type of case – business-owned or trust-owned.
A business-owned case requires the following documents:
· Signed and audited business tax returns and financial statements for the last 3 years · Articles of incorporation · Personal tax returns and financial statements if the business is owned as an S-corp
A trust-owned case requires the following documents:
· Trust asset statements and trust tax returns for the last 3 years · Trust agreement · Personal tax returns and financial statements if the trust is newly formed
What collateral is Required?
Most policies require only the policy itself as collateral. In certain cases, however, they will ask for more collateral, such as an investment portfolio, or the cash value of a different life insurance policy. Each case differs.
Throughout the loan’s term, you will be required to maintain adequate collateral, which varies by lender. If you can’t keep the required collateral, you may have to forfeit the loan and cover the premiums yourself.
Who are the Lenders for Commercial Premium Financing?
Any financial institution can be the lender for commercial premium financing. Some individuals get the financing from their local bank. Others turn to financial institutions that specialize in commercial premium financing.
The right lender for you is the one that charges the rate and fees you consider fair. As you look for a lender, also assess their financial situation and ensure they are a stable company before taking out the loan.
How Long does it take to Process the Loan?
Most loans take 2 to 4 weeks to process and are processed along with the application for the life insurance. As long as all documentation is provided right away, you should be able to finalize the loan within one month.
What Rates do Lenders Charge?
Commercial premium financing is usually based on the 1-Year LIBOR (London Interbank Offered Rate), or the Prime Rate. Like any financing, the rate is determined by the amount you borrow and the risk of default.
What are the Benefits of Premium Financing?
Commercial premium financing has many benefits including:
· You don’t have to pay your insurance premiums out of pocket · You don’t have to cash in any investments to cover the premiums · Provides you with many options to cover your life insurance premiums
Is the Approval Good Forever?
Unlike most loans, commercial premium financing requires annual re-approval. Lenders do this to ensure your collateral is still of a high enough value to cover the necessary collateral. Lenders also check your financial status to ensure you are still able to repay the loan. If anything changes in your financial life, the lender could ask for more collateral or discontinue the premium payments for the future.
What is Collateral Assignment?
The collateral assignment provides the lender with access to the death benefit and cash value of your life insurance policy. Until the lender releases the assignment, you don’t have access to the life insurance proceeds.
Premium financing can be a great strategy for asset protection as well as estate planning.
With this structure, a taxpayer can pay interest on a loan and allowed to obtain a large insurance policy while utilizing a low amount of the clients estate tax exemption.
Premium financing allows a person to create an insurance trust that can borrow the money from a lender and pay the annual insurance premiums. Not only does allow for large asset protection but can be critical for estate planning.
But the structure can be complex. That’s why we’ve created a list of many of the FAQs that tie directly into commercial premium financing, make sure you review with your CPA and estate attorney.