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Keep Assets in Place with Insurance Premium Financing

Keep Assets in Place with Insurance Premium Financing
You know better than anyone how much you depend on the liquidity of your assets to help maintain your lifestyle. Life insurance — whether you love it or hate it — may offer benefits to people seeking to manage an estate or financial plan that involves the optimal management of estate tax obligations while keeping that liquidity in place. 
The Advantages Of Insurance Premium Financing 
Depending on your anticipated estate tax liability and the amount and nature of the death benefits you want to pass along to heirs, insurance may be a necessary part of your financial plan. Policy premiums can significantly impact your liquidity if paid out of pocket. In many cases, these premiums can exceed $500,000 per year. That’s where insurance premium financing comes in — it’s one of the most cost-effective strategies to help pay for these high premium policies that are used to protect your assets, while creating estate liquidity. Instead of funding premium payments by liquidating investments and incurring capital gains tax, or using existing capital to pay the premiums, a premium financing plan can help you keep current assets in place.

Typical Ways This Strategy Is Used 
Generally, people who purchase life insurance take comfort in knowing that they’ve planned for the unexpected, developed an estate planning strategy or helped transition a closely held company to the next generation. Insurance premium financing is a powerful, tax-efficient way to utilize credit in your wealth planning process, giving you the ability to provide future benefits for generations to come without jeopardizing your current cash flow situation or liquidating assets. There are several ways to use this strategy, including: 

Estate Planning 
Utilizing insurance premium financing allows an estate to maintain its assets rather than drawing on existing capital to pay the premiums. Borrowers like this option because they oftentimes can invest their capital for a higher return than the cost of financing without having to liquidate assets (e.g., real estate, investments, fine art and collectibles) at an inopportune time. 

Financing the premiums rather than paying them out of pocket is a popular strategy for high-net-worth estates to transition existing investment holdings or appreciated assets to the next generation. Most insurance policies used as collateral for insurance premium financing are owned by an Irrevocable Life Insurance Trust (ILIT) created and managed by the trustees of the estate. The ILIT buys and owns the insurance policy. Upon the deaths of the insured, the policy’s death benefit proceeds are used to pay off the premium finance loan and then disbursed to beneficiaries to settle estate taxes and make other cash distributions according to the terms of the ILIT. 

For example, let’s say you want to leave your real estate holdings to your daughter or son. However, they have their own careers, and don’t want the headaches of managing your properties. You could structure a life insurance policy to cover any debt on the real estate, taking advantage of insurance premium financing. When your child inherits the policy’s death benefit, they could pay off the real estate debt and sell the real estate in its entirety unencumbered by any mortgage. In the alternative, the beneficiaries could take more time selling the properties piece by piece, and not have to resort to a “fire sale.” 

Succession Planning 
The act of transitioning ownership of a business can be a complex process. Business owners, especially family-owned businesses, can use financed life insurance policies as a way to transition ownership from relatives, siblings, or one generation to the other. Financing the premium can be an affordable option to achieve this conversion as well as offering peace of mind throughout the transaction. Talk with your advisor about the estate tax considerations and how implementing an insurance premium finance strategy now could help avoid levering up with debt in the future.

Alternative Investment Strategy 
For young adults, insurance premium financing can be used as an alternative investment strategy. Perhaps you contributed the maximum amount to your Individual Retirement Account (IRA) and 401(k) contributions and are seeking an alternative to investing in the stock market. You could buy a whole or indexed universal life insurance policy that accumulates cash value. By doing this at a young age, the policy is more affordable (likely you have fewer medical issues at this point in your life.) Financing the insurance premium would keep your cash flow and assets liquid until you reach retirement age, when the cash value on the policy can be used as an alternative investment to supplement your income. 

Of course, there are other scenarios and ways an insurance policy can be structured and premium financing set up, and each is customized for your unique financial situation. 

Next Steps 
There are important considerations pertaining to insurance premium financing and how it can benefit your overall financial plan. Contact Commerce Trust today for more information about how our team of advisors can help with this unique and personalized wealth planning strategy. 

The opinions and other information in the commentary are provided as of February 27, 2023. This summary is intended to provide general information only, and may be of value to the reader and audience. 

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. 

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Commerce Trust is a division of Commerce Bank.