Many premium financed (leveraged) life insurance policies will require individuals to have liquid wealth or assets. These will be used as collateral when taking out a loan to fund the insurance policy. Most types of these programs are not advantageous, but there is one Premium Financed (Leveraged) Life Insurance program that offers a solid opportunity in our opinion. With these programs, the cash value of the life insurance stands as the collateral. The following article discusses the main differences between a traditional premium finance life insurance and the new “PF” program found.
Estate Planning and Asset Protection: A Premium Financed (Leveraged) Life Insurance Program Design to Benefit Individuals
There are literally dozens of life insurance programs that are financed by borrowing money to cover premiums. Unfortunately, many of these are not as investor-friendly as they should be. There is, however, one program that is designed to provide optimal benefits to wealthy individuals and makes the most sense for those seeking this strategy. To have a better understanding of these types of policies, we examine traditional premium financed (leverated) life insurance programs.
Defining Traditional Premium Financed (Leveraged) Life Insurance
With premium financed (levearged) life insurance the affluent individual will fund a sizable life insurance policy with borrowed money. The details that are involved are pretty straightforward. The individual will first borrow a certain amount of money each year. That money is then used to pay the premium on a cash value life insurance policy. As with any type of loan, the individual is personally liable for the amount that has been borrowed (i.e. recourse) as well as other assets that will be used as “collateral”. The significant difference is that, in most instances, there will be no interest payments on the borrowed amount unless the actual cash value of the life insurance policy dips under a set dollar value.
What this means is that as long as the cash value remains relatively higher (than that set dollar value), the individual will not pay the interest amount because the lender will be paid back the load when the insured dies. The loan repayment is done with the amount that is received from the policy as a death benefit. However, if the value does drop below the set dollar value that is stated in advance, payments must be made on the loan (which could include the interest and the principal amount). Many insured individuals will use their other assets to make these payments. If everything works as expected, you will be getting a death benefit for “a very low or near zero cost.”
Stocks/Mutual Funds as Collateral for Loan Over Cash Value of Life Insurance
There are multiple life insurance programs which the insured will be forced to provide collateral for the loan. This collateral is typically in the form of mutual funds or stocks. The reason for this occurrence is for the lender to be able to sell the stocks should the loan need to be repaid and the client does not have the money readily available.
The above scenario is one reason why typical premium financed (leveraged) programs can be a risky proposition. Since typical premium financed (leveraged) life insurance plans will necessitate the insured to have liquid assets to be used as collateral, it is difficult for anyone without these liquid assets to secure a premium financed (leveraged) life policy. You need to be aware of the details of the lending terms when purchasing a premium financed (leveraged) life insurance policy. The agreement will usually provide the lender with access to wealth in the event that the loan cannot be repaid.
A Better Premium Financed (Leveraged) Life Insurance
The best (PPLLI) premium financed (leveraged) life insurance plan will be assumed to be a viable program for anyone who is eligible and who shows a need for carrying life insurance for a long time. These policies are not short-term, nor do they have high rates of interest. They are a long-term solution with a recourse loan arrangement to offer the insured a life insurance policy with the least amount of collateral in order to obtain premium loans for considerable insurance.
The best PPLLI plan offers substantial steady amounts of premium financed (leveraged) life insurance and is beneficial for anyone who is affluent, generally with assets over $8 million. These individuals also have a high probablity of zero cash expense to pay for the life insurance policy. In order for the life insurance policy to quickly build high cash value to meet the collateral conditions of the loan, large contributions must be made to the insurance policy. In some cases, outside collateral may be required in order for the loan process to begin. This is especially true when the policy is just in the beginning years. The goal is for the cash value in the policy to become the primary source of collateral. When this happens, all outside collateral is let go and the loan will be covered by the cash value of the policy.
When using a traditional premium financed (leveraged) program, the growth of the cash value is typically very slow and progressive. (PFLLI) premium financed (leveraged) life insurance plan differs from a traditional one as it makes use of indexed equity life insurance. In addition, the life insurance policy will be financed around the MEC (Modified Endowment Contract) minimum. This policy is unique because it is created in a way that the cash value growth will cover the balance that will be accumulated on the loan every year.
One of the most important aspects of using a (PFLLI) premium financed (leveraged) life insurance plan is the exit plan of action. Every plan that can be purchased will offer some type of exit plan of action on the loan which will either occur during the ownerï¿½s lifetime or when they die. With a (PFLLI) premium financed (leveraged) life insurance plan, the cash value performance does not affect the loan repayment. This is what makes a PFLLI plan unique. The only requirement is that the life insurance policy remains in effect in order to pay off the loan.
When purchasing a (PFLLI) premium financed (leveraged) life insurance plan, an irrevocable trust is used. The process involves the irrevocable trust purchasing a life insurance policy. The face amount of the insurance policy will be enough to cover the cost of estate taxes or enough to build a solid family legacy inside the irrevocable trust. The lender will make an agreement to pay all premiums and the insured will have the opportunity to let the interest add up for a specified term. When the loan term comes to an end, the insured owner may renew the loan and have it underwritten again. All of the beneficiaries named on the trust will obtain the death benefit.
In Part 2 of this article we will highlights the many benefits of using a (PFLLI), premium finance (leveraged) life insurance policy inside of an irrevocable trust.
Please contact Estate Street Partners at (888) 938-5872 and see how we can protect your assets and maximize your returns in retirement.