Premium Financing Quarterly Best-Use Cases
For many agents, most of their premium financing cases are part of an estate planning strategy. Clients with estates in excess of $11.58 million (for an individual) usually don’t want to saddle their heirs with the federal estate taxes that will be due within nine months of their death. But when an estate is illiquid, that can create a cash crisis for heirs. Premium financing allows clients to purchase a policy large enough to pay the tax but borrow the money to pay the premiums. That allows other assets to remain in the business or in other higher-return investments. “Putting money into a life insurance policy, it’s really dead money,” said Todd Hammer, an insurance agent with Prudential Financial in Stamford, Conn. “They have better uses elsewhere.” Clients also use premium financing for business-purpose life insurance, such as
with a key person strategy. “I have several hedge fund clients,” Hammer said. “If the hedge fund is a ship, they are the rudder. If something happens to them, then the ship is rudderless, and it would cost millions of dollars in a very short time.” Using premium financing to fund key person insurance protects the business after the death of a rainmaker.
No Free Lunch
Although financing offers considerable value, agents and advisors must be careful not to overpromise. The strategy needs to be presented realistically so clients are not under the impression that they don’t have to pay for life insurance. Tim Whitmore, chief marketing officer at Life & Annuity Masters, said that strategy, known as “capitalization of interest,” is dangerous for clients. “Back in the day, and even a little today,
Not everyone is a suitable candidate for premium finance. After the need for life insurance is established, premium financing might be considered as a method to fund the life contract if the client has the following general characteristics:
• Has more than $5 million net worth (for traditional finance) or $300,000 of income. • Needs life coverage for estate tax, estate equalization, liquidity, or for business needs such as stock redemption. • Seeks a high return on assets. • Wants to minimize gift tax exposure. • Feels comfortable using leverage.
4 February 2020
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