PREMIUM FINANCING
Premium financing involves the lending of funds to a person or company to cover the cost of an insurance premium. Premium finance loans are often provided by third party finance entity known as a premium financing company. Premium financing is mainly devoted to financing life insurance that differs from property and casualty insurance. Typically, clients that engage in this transaction are age 29 to 75; with a net worth of $5M or greater. Younger clients benefit in the current environment due to the advent of premium financed indexed universal life policies.
Net Worth Tiers: Depending on age and income
1. Ages over 50 to 70: 5 M and Up, min income of 250K
2. Ages 30-50: 2.5 M – 5 M, min income of 250K
3. Ages 18 – 65: An annual income of 100K
WHAT IF YOU ARE NOT HIGH NET WORTH?
We are offering a more affordable premium financing options including “Kaizen Plan.” The Kai-Zen Plan provides a total benefits solution. These benefits go beyond the typical 401(k) or health insurance. By using leveraged funds to provide approximately 60-75% of the total contribution to the plan, Kai-Zen allows you to reduce costs while increasing benefits.
FOR A QUOTE
With the Kai-Zen Plan, there are no personal or business loan documents to sign*!
The Kai-Zen Plan is designed for business owners, executives, professionals, doctors, attorneys or similar key employees. To qualify, you must be able to obtain a standard or better risk class with the carrier, be age 65 or under, and have income of at least $100,000 annually.
Each Kai-Zen Plan participant will own a personal trust which will in turn own their policy. Each year, for up to 5 years, you contribute your portion of the premium to your trust. Your contribution and your policy are the sole collateral for the loan.
*Loan documents are at the trust level which is the borrower of the bank financing. **Additional plan administrative fees will apply.
BENEFITS
There are a number of benefits to financing insurance premiums. These include:
– Eliminates the requirement for a large up-front payment to an insurance company.
– Multiple insurance policies can be attached to a single premium finance contract, allowing for a single payment plan to cover all insurance coverage.
– Premium financing is often transparent to the individual or company insured. Brokers transmit the completed premium finance agreement to the premium finance company, and the policyholder is billed as they would be for any other typical insurance policy.
– Allows clients to obtain needed coverage without liquidating other assets.
– The main benefit in premium financing is avoiding the opportunity cost of paying out of pocket. By using other people’s money (leveraging a lender’s capital), clients can retain a significant amount of capital known as retained capital
SIMPLY PUT, PREMIUM FINANCING IS A STRATEGY FOR PAYING FOR LIFE INSURANCE. IT ALLOWS HIGH NET-WORTH INDIVIDUALS WHO NEED A LARGE AMOUNT OF LIFE INSURANCE TO USE AN ALTERNATIVE METHOD FOR PAYING PREMIUMS – RATHER THAN USING YOUR CURRENT CASH FLOW OR LIQUIDATING ASSETS TO PAY PREMIUMS, YOU OBTAIN THE FUNDS NEEDED BY BORROWING FROM A THIRD PARTY LENDER.
HOW IT WORKS
Your attorney drafts an Irrevocable Life Insurance Trust (ILIT) and the
ILIT purchases a policy on your life. Because you don’t own the policy, the proceeds will not be included in your estate for estate tax purposes. A third-party lender loans funds to the trust each year to pay the annual premiums on the policy. You may choose to finance a portion of the premium, all of the premium, or the premiums plus accrued interest and other costs.
Ideally, the loan will be fully repaid during your lifetime, at which time, your ILIT will own the policy outright. If not, any unpaid loan or loan interest is paid back to the lender from the policy proceeds at your death. Any remaining death benefit is paid to your ILIT for the benefit of your beneficiaries.
RISKS
As there are various risks associated with premium financing, careful consideration should be made to determine if this concept is suitable for you.
Interest Rate Risk – The interest rate charged on the premium finance loan is usually tied to the one year London Interbank Offering Rate (LIBOR). Increases in this rate can increase your loan rate.
Crediting Rate Risk – The amounts credited to the life insurance policy cash value each year may be less than projected.
Collateral Call Risk – In the event of a loan default, any supplemental collateral you pledge to secure the loan (in addition to the policy’s cash value) may be called and possibly lost.
Potential consequences should be discussed and determined to be within your risk tolerance before proceeding with any financing strategy.
COLLATERAL
Premium finance loans are 100% collateralized at all times. The policy’s cash surrender value typically serves as the primary source of collateral.
However, additional collateral will most likely need to be pledged –
Especially in the early years of the contract, when the amount of the loan and accumulated interest exceed the cash surrender value.
Acceptable forms of additional collateral can include:
• Marketable securities
• Cash surrender value of other life insurance policies
• Letter of credit (from a bank with AA- or better rating)
Assets that cannot be easily converted to cash, such as real estate, artwork or collectibles, may not be viewed as acceptable forms of collateral. However, these assets may be considered by the bank when obtaining a letter of credit.