Life insurance can help young professionals protect their loved ones while they also accumulate more for their future, increase their retirement income potential, and protect legacy assets from estate taxes.
A premium finance strategy may be a good option for funding the policy.
Email Jarad@dibcompanies.com
Sample Case:
Male, 43YRS Old, Father of 3 children
Net Worth: 1.5M
Annual Income: $815,000
Still has student loan debt.
Although he has a term policy, William could further benefit from cash value life insurance. As his net worth and income continue to increase, he will need more death benefit protection. He also realizes it’s more cost- effective to purchase coverage when he’s young and in good health.
Solution:
William’s financial professional suggests that he obtain a loan through a commercial lender to finance his Lincoln indexed universal life insurance policy. He can pay less out of pocket for the amount of coverage he needs.
The policy offers growth potential from a choice of options, including and account linked to the Fidelity AIM® Dividend Index that will provide William with a guaranteed return regardless of market performance, while managing market volatility.
This will give him the opportunity to build a financial resource for his future.
Numerous issues can arise when the time comes to pay for large life insurance contracts:
1. High net worth clients often have their insurance owned within trusts. Gifting limitations may come into play.
2. The opportunity cost of paying a life insurance premium may discourage clients who have their resources allocated to high performing assets.
3. Large, long-term commitments to premium payments can be a barrier.
4. Cash-flow timing can be an issue. Cash available for premiums may be low currently, but the future sale of a business or some other large cash influx may be on the horizon.
5. For these clients, the use of third-party money frees up their capital for investments. For the right client, premium financing may provide the solution.
Estate planning solution
Life insurance owned by a trust is a popular method to provide liquidity for estate taxes at death. Clients placing life insurance in a trust outside their estate may have trouble finding enough room under the IRS’ annual gift-tax exclusion to fund their life insurance needs. This exclusion amount does not apply if the trust borrows the premiums it needs to fund the life insurance.
Business owner solution
Business owner clients may prefer to borrow from a third party and leverage their life insurance premiums. This enables them to wait for the right time to liquidate an asset to pay off the loan. Premium financing may provide an additional option when a business sale is imminent and the owner anticipates a large influx of cash in the future.
Using premium financing in the proper context with the right client can provide solutions to some of the funding issues high net worth clients face.
Borrowing to pay premiums
1. Does not create a gift, although the interest payments do create smaller gifts than the full premium.
2. Potentially leverages the out-of-pocket payments of interest, which can significantly increase the potential return on death benefits.
3. Helps minimize the client’s long-term commitment to premium payments by simply paying the interest on the loan.
4. Using a loan structure to purchase life insurance while the client’s cash flow is lower can lock in insurability and allow for a rollout later, when the client realizes a large cash infusion.