What is Premium Financing?
Premium Financing is the borrowing of money from a qualified bank in order to pay large life insurance premium payments. The policy is assigned to the bank - to the extent of their interest - as collateral for the loan; additional collateral is often needed. Not all insurance carriers accept financed premiums.
What is the purpose of Premium Financing?
In a properly structured PF program, the client may net much higher death benefit and/or higher tax-advantaged income distributions in retirement with significantly less capital outlay.
How is The Leveraged Distribution Strategy™ different from other premium financing plans?
Traditional premium financing focuses on maximizing the death benefit, typically to pay large estate tax. TLDS™ focuses on minimizing the death benefit to maximize cash value growth and potentially *tax-advantaged policy loans in retirement. The permanent life insurance element will help cover your life insurance needs from today through your retirement years, helping to provide liquidity and funding legacy objectives.
Who is the ideal candidate for The Leveraged Distribution Strategy™?
Individuals who have at least 15 years until they need income distributions, a net worth of $2,500,000+, and an income of $300,000+ are the best candidates for this strategy. Some carriers may allow a lower net worth for those with significantly higher income, especially at younger ages.
How long is the typical funding period?
Most funding periods are 5-12 years, with loan repayment in year 11 or later.
Are any payments due during the funding period?
All premium financing programs require interest payments to be made each year. Tennyson’s strategies are typically more conservative. We focus on minimizing risk to the client by illustrating a way for the client paying interest as well as some portion of the principal during the funding period.
How do the loans get paid back and what are the exit strategies:
A critical component of PF is having a plan to repay the loan. TCP will supply an exit strategy letter to each premium finance committee outlining an exit strategy. The most common ways to repay the loan are:
- Taking a loan from the policy’s cash values in year 11. This can occur later or earlier, if needed, to the extent that the policy has sufficient value available to do so. The policy loans remain inside the policy and are forgiven at death
- Using other assets to pay off the loan
- Using a combination of policy loans and other assets
- Insured passes away; the death benefit repays the bank’s interest and the remaining benefit is paid to the policy beneficiaries
Which banks/lending institutions does TCP use?
Most of our lending partners are private banks or niche banks that specialize in Premium Financing. We will verify the best lending program for each client and manage this process each year. The minimum annual financed premium is $100k. Rates may be fixed or variable.
What documentation is needed for the lender each year?
Lenders may be required by regulation to review loans each year. As part of this review, clients may need to provide a recent tax return, net worth statement, pay stub and liquidity statements.
What are the risks of premium financing?
The loan interest rate could increase beyond the rates projected, which could:
- Increase out-of-pocket costs
- Possibly require additional collateral
- Reduce net proceeds to beneficiaries if interest is allowed to accrue. (The majority of TCP’s cases due not accrue interest due to higher interest rate risk)
- Increase risk of loan default if payments are not made
What happens if the policy doesn’t perform as projected?
The life insurance crediting rate may lag the annual loan interest rate, which could cause:
- Higher collateral requirements
- A need to pay additional premiums
- Insufficient policy cash values to repay the loan balance
What steps are taken to mitigate risk?
It is critical to understand the risk involved with premium financing. TCP will engage in ‘what-if’ conversations with each client to ensure they understand the risk, and how it can be reduced and/or avoided wherever possible.
What happens if the policy performs better than projected?
The life insurance crediting rate may exceed the values projected, which could allow for:
- Lower collateral requirements or a release of collateral
- Increased income distributions, or distributions beginning earlier than projected
- Policy values sufficient to repay lender earlier than projected
*This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified advisor.
No strategy assures success or protects against loss.