It has already been established that using the best premium financed life insurance policy will provide ultimate benefits to clients for Estate Planning and Asset Protection. The following article highlights the many benefits of using PFLI as well as a detailed example citing just how much an insurance policy could grow by using PFLI.
Read Part 1 on Premium Financed Life Insurance
Ultimate Benefits of Using PF Premium Financed Life Insurance Policy for Estate Planning and Asset Protection
As mentioned in the previous article, the premium financed life insurance policy (PFLI) differs greatly from a traditional premium financed life insurance policy. The PFLI will provide additional benefits to affluent individuals, including the following:
- The superior (PFLI) premium financed life insurance policy inside the irrevocable trust will use a special structure in which the principal and interest on the loan is paid to the lender no matter how much cash value the policy accumulates (as long as the life insurance policy is in effect). All of the costs associated with the loan (i.e. interests, principal and other fees) will combine each year until there comes a time where the loan is retired or the policy holder passes away. At this time, banks operating in the US do not have the option of offering a non-performing loan.
- Using the superior (PFLI) premium financed life insurance policy inside an irrevocable trust will create a unique chance for the insured to use financial leverage. They will also be able to earn a return on any of their assets that have been put up for collateral. With other traditional life insurance plans, the profits from the assets would have been used to pay the premium on the insurance as well as any gift taxes that were due.
- The death benefit with a superior (PFLI) premium financed life insurance policy inside the irrevocable trust will be estate tax free and will be increased in order to pay all beneficiaries the death benefit amount that was originally desired.
- Superior (PFLI) premium financed life insurance policies offer an unconventional relationship between the client and the lender. It is one that has a longer term and the lowest interest rates possible. When compared to US programs, the superior PFLI program offers the lowest lending rates.
- All assets that are used for collateral will be left under the complete control and management of the owner. There will never be a situation in which the lender will take control of the assets.
- When the superior (PFLI) premium financed life insurance policy is structured in a proper manner, an insured has the opportunity to use real estate for collateral instead of stocks or mutual funds. The lender does not have need to have guarantee. Assigned assets are the only ones that can be used for collateral.
- The superior PFLI plan can be adapted so that clients over the age of 40 can receive the benefits for the program.
An Example of a Superior (PFLI) Premium Financed Leveraged Life Insurance Policy in Action
A couple, aged 49 and 48, wish to acquire a large life insurance policy worth $25 million for the benefit of their son. The couple has an estate that has a current value of $35 million. The cost for the premium each year would be $273,000 until the older spouse reaches the age of 100. The spouse has the option of gifting the premium amounts to an irrevocable trust or ILIT (irrevocable life insurance trust), but doing so would add to the annual cost due to gift taxes. This would increase the cost per year to almost $400,000. Should the spouse reach the age of 100, $19.5 million would be the outlay and this amount does not even include any missed investment opportunities.
The couple in this example has three choices in regards to what they should do. 1) They can decide to not purchase any insurance at all. 2) They can pay for the insurance from their own cash account, which would equal around $19.5 million. 3) They could use the superior (PFLI) premium financed leveraged life insurance policy, which would cost zero cash out-of-pocket outlay. $2.27 million would be the peak collateral at risk amount and the assigned or designated assets what would be used as collateral would be $2.76 million. The “at risk” means the net amount that would be at risk for the defected loan.
In order for the couple to use PFLI, they will assign or designate certain assets as collateral so they can apply for and receive the loan for the premium. The collateral that is at risk is the actual difference between the bank loan balance and the cash value at the time of surrendered in the life insurance policy. The following displays what the at risk collateral will be for each year:
| Year | Risk Collateral |
|---|---|
| 1 | $1.67 million |
| 2 | $1.69 million |
| 3 | $1.87 million |
| 4 | $1.98 million |
| 5 | $2.22 million |
| 6 | $2.27 million |
| 7 | $2.19 million |
| 8 | $2.05 million |
| 9 | $1.81 million |
| 10 | $1.29 million |
| 11 | $610,000 |
| 12 | $120,000 |
| 13 | $0 |
Based on these projected numbers, after the 11th year, the couple will have minimal capital at risk, with it completely dropping to zero in year 13. In other words, there will be no net amount that will be at risk for a defected loan. This means that they could simply give up the loan and pay off the debt by giving the life insurance policy to the bank. Of course, this is the wrong thing to do because the benefits that will be gained from this plan will skyrocket in the future.
By the 19th year, there should be enough cash value in the life insurance policy so that the couple can do one of two things: pay off the balance of the loan by using a zero-interest loan from the life insurance policy, or simply let the cash value to remain in the policy, allowing it to provide coverage until the age of 100 with no additional premiums. As the cash value increases, the face value of the insurance policy will also do the same. So when the older spouse reaches age 75, the face amount of the policy will be worth $32.5 million. Age 80 would increase the amount to $44.7 million. Should the owner reach the ripe old age of 90, the face value will be $100.9 million.
The superior (PFLI) premium financed life insurance is without equal when it comes to the availability of loans offered, the life insurance policy conditions and collaterals that can be used for the loans themselves. As one can see, this is a powerful way to build wealth inside of an irrevocable trust and could provide generations of wealth for your blood line for the right person and family.
Please contact Estate Street Partners at (508) 429-0011 and see how we can protect your assets and maximize your tax-free returns in retirement.