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THE FUNDAMENTALS OF THE PREMIUM FINANCE STRATEGY Grantor of Business Owner

4) Additional collateral, if needed

Commercial Lender

3) Collateral assignment and loan payments

1) Transfer gift or sell assets

2) Loan(s)

Irrevocable Life Insurance Trust or Business Equity

5) Premium(s)

Beneficiaries or Business Owners

7) Distributions

6) Net cash value and net death benefit proceeds

WHAT IS PREMIUM FINANCING?

WHAT ARE THE BENEFITS?

Premium Financing is life insurance premiums for affluent clients. It involves borrowing the premium amounts from a commercial lender as apposed to paying them out of pocket. The intial cost becomes only the loan interest which can be paid in cash or accrued. The loan is collaterized primarily by the policy’s cash value with any shortfall covered by pledging personal assets.

Paying Loan interest and pledging collateral instead of paying premiums can help to reduce the cost of the strategy. Such results could be an increased rate of return on cash accumulation and/or on the net death benefit . With situations involving giting to an irrevocable trust, the gift is measured by the annual loan interest if paid by the grantor as opposed to the premium amount, thus helping to reduce or eliminate gift tax consequences of large premium requirements. The need to liquidate, or redirect cash flow from, lucrative investments can be reduced or eliminated.

Life Insurance Company

WHAT ARE THE CONSIDERATIONS? It is important to have a plan in place to replace the loan. The future loan can be repaid by taking a distribution from the policy’s cash value, from other assets or cash flow, from the proceeds of a liquidity event such as the sale of retained assets, or some combination of the three. Rising interest rates could result in more out-of-pocket cost than originally projected. The policy’s cash value performance is typically not guaranteed and could fluctuate from year to year based on the underlyiing interest crediting and policy charge structure. If the loan defaults, perhaps due to a planned exit strategy failure, the lender may foreclose on collateral, including the policy.

Daniel P. Wachs | CFP, ChFC, CLU 1431 Opus Place #630 Downers Grove, IL 60515 Phone : 630.445.1399 | www.perpetualwm.com Email : dwachs@perpetualwm.com

Fundamentals of premium finance  
Fundamentals of premium finance