Premium Financing Explained for Wealth Managers

Premium Financing: Understanding the Basics

What Is Premium Financing?

A wealth transfer and retirement planning approach that allows clients to:

• Avoid liquidating assets for life insurance premiums
• Borrow premium payments from banks
• Leverage lender's capital for insurance funding

Candidate Requirements

Age and Health

• Age Range: 18-85 years old
• Health Status: Must be healthy
• Note: Younger clients often use for business planning

Financial Requirements

1. Traditional Requirements
   • Net Worth: Typically $5 million minimum
2. Alternative Qualification
   • Lower net worth (as low as $1 million)
   • Must have strong income to compensate

Example Case:

• 35-year-old doctor
• $1 million net worth
• $350-400K annual income
• Would likely qualify despite lower net worth

Why Consider Premium Financing?

Benefits

1. Retain Capital
   • Keep cash for business investments
   • Maintain liquid assets
   • Preserve investment opportunities
2. Cost Effectiveness Example Scenario:
   • Traditional: $100,000 annual premium out-of-pocket
   • Premium Financing: Small or no premium with adequate collateral
   • Result: Retain $100,000 for business growth

How Premium Financing Works

Basic Structure

1. Initial Setup
   • Establish ILIT (Irrevocable Life Insurance Trust)
   • ILIT provides collateral to lender
   • Lender provides premium payments to trust
   • Trust holds life insurance policy
2. Ongoing Management
   • ILIT gifts interest payments to trust
   • Loan can be paid from death benefit or cash value
   • Beneficiaries receive remaining death benefit

Two Common Applications

1. Retirement/Investment Planning

• Borrow from cash value
• Take withdrawals to pay lender
• Build cash value for future use
• Access funds for:
  • Business investments
  • Retirement supplementation

2. Buy-Sell Agreement Funding

Process:

1. Business works with specialists to structure financing
2. Life insurance funds buy-sell agreement
3. Example with 50/50 Ownership:
   • Each owner has policy on their life
   • If Owner 1 dies:
     • Death benefit goes to company
     • Owner 2 uses proceeds to buy out Family 1
   • If Owner 2 dies:
     • Death benefit goes to company
     • Owner 1 uses proceeds to buy out Family 2

Implementation Considerations

1. Should be presented as an option, not pushed
2. Must fit client's financial situation
3. Requires coordination with financial professionals
4. Need regular review and management
5. Consider long-term implications

Key Advantages

1. Preserve working capital
2. Leverage bank's money
3. Maintain investment flexibility
4. Support business continuity
5. Enable estate planning