Premium financing seems like a hidden but best secret in the financial industry these days. Unless if your financial professional keeps you up to date on the best and latest techniques, he may also just be uninformed as anybody.
In simple terms, Premium Financing is acquiring one irrevocable life insurance trust borrow funds from a bank which will cover the cost of insurance for a large insurance policy. This tool can be very beneficial to those of high net worth to not only fund huge insurance policies but also to create liquidity at death, income reduction, estate as well as gift taxes.
Policy Of Premium Financing
Premium financing has a policy that regulates how it works. The way it works is simple. Initially, one sets up an irrevocable life insurance trust which is the owner and beneficiary of the premium finance policy. As soon as the trust is in an arrangement with a bank, who is the premium lender, one collateralized assets in ensuring the return of the loan from the bank. However, keep in mind that this is only a collateral and you do not liquidate these assets. Within the allotted amount of years, the bank will pay the policy’s premium. The premium finance client may have to pay interest to the lenders because this is not a free insurance. The implementation is to decrease premium payments for the proposed client. The death benefit is then paid out to the trust after the client has passed away. This is generally income-tax free. Once the outstanding loan from the death benefit is paid by the trustee, all the outstanding balance is saved to benefit the deceased’s heirs.
Maximizing Returns For High Net-worth Clients
The main aim of premium personal financial planning is acquiring needed life insurance at a minimal current out-of-pocket cost. Ponder, even for clients with high net-worth, the return benefits are high with little investment. This allows the holder to invest the money that would have been used to pay premiums in vehicles. It also offers higher return rates.
For example; John is a successful business owner and wants to acquire ten million dollars in permanent life insurance with an annual premium of hundred thousand dollars. If he writes a check to cover the premium amount, the out-of-pocket cost here in year one is hundred thousand dollars. With a five percent interest rate on the policy, the cash value appreciates to one hundred and five thousand dollars at the end of year one. A point to note, John’s cost could have been even greater if he was forced to liquidate other investments to pay the premium. This comes with a substantial capital gain and also prevents loss of earning generated from investments.
Companding growth in money overtime is the power of premium financing. Potential losses are present for clients that do not use it.