Premium finance: A traditional approach
Gradient Insurance Brokerage
Using other people's money is a concept that most of us take advantage of every day. We buy houses, cars, small businesses and a variety of items using someone else's funds. Most people don't have the means necessary to just stroke a check for the cost of these items, so we head to the bank, local credit union or a long-lost uncle to borrow the money. The terms of the loan can vary depending on a variety of factors, such as credit score, credit history and if there is any money to lend at that time. Years ago, the question was posed, "Could the same be done for large premium life insurance cases"?
Financed life insurance has been around for many years and, if used properly, it can be a very useful planning tool. In its simplest form, premium finance in the life insurance arena is nothing more than borrowing the premiums or a portion of the premiums to fund a large life insurance policy. However, just like financing a house, there are multiple factors that need to be met in order to make the process work. Of course, this isn't a one-size-fits-all strategy and, often, it's reserved for your more affluent clients.
While working with hundreds of agents and advisors each week, there is a common theme. The theme is that estate taxes are back in full force and, undoubtedly, will never go away. Many agents and advisors have their own theories as to why, but the most common one is tied in to the current economic and political environment. With increased government spending, the conclusion is higher taxes and potential lower exclusion amounts. Many agents and advisors are going back to address their clients who are sitting idle and waiting to see what is going to transpire with the estate tax before taking action. The path seems very clear -- now is the time to take action.
Life insurance is a valuable tool in the estate planning process. If we assume the estate tax exemption remains at $1 million and taxes continue to increase, there will be a substantial number of clients that need to move assets out of their estate to stay below the exemption. No matter how wealthy the client may be, if they don't understand the need for the insurance coverage, the case has a very small chance of getting placed. However, for those client's who do understand the need for the coverage and have the ability to pay the premiums, life insurance and premium finance can be a viable solution.
High-net-worth clients are facing estate tax problems and have a very real need for insurance planning. Most understand the power of using leverage. By combining the needed life insurance and premium financing outside the estate, we are able to accomplish the needed funding and obtain the clients goals of paying the estate taxes.
In the past, premium financed life insurance has been marketed as "free insurance;" however, those days no longer exist. Today, we focus on a more traditional approach by maximizing the client's contributions with the financing to provide the coverage they need.
To better illustrate the power of premium-financed life insurance, let's review the following scenario: Our estate planning basics tells us we can only gift $13,000 per child, per parent in a given year. If we have a married couple with two children, we can only gift $52,000 a year. If a married couple is looking to purchase a $20 million second-to-die policy and the premium is $250,000 to fund the contract, this presents a problem. If the couple gives anything more than the $52,000, it would be subject to gift taxes. However if we have the clients gift their $52,000 to a trust and the trustee in turn borrows the remaining premiums to fund the policy, we may have a solution.
The premium finance marketplace is very viable in this current economic and political environment, if the correct steps are taken to set up the case, and it can be a tremendous solution for your high-net-worth clientele. Show your clients that you have a solution in these challenging economic times. Take the steps to see how you can implement this powerful sales approach into your arsenal of financial planning solutions.
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