Enhance Your Wealth Strategy with Life Insurance Premium Financing

Financial planning for high-net-worth individuals involves a distinct set of strategies designed to grow and protect wealth while minimizing tax liabilities. This includes asset management, estate planning, charitable contributions, and utilizing tax-advantaged accounts such as IRAs and 401ks, while employing approaches like tax-loss harvesting and strategic business ownership structures can significantly bolster a portfolio’s financial position.

Life insurance premium financing stands out as a sophisticated and advantageous strategy for high-net-worth individuals, businesses, and business owners seeking to optimize their wealth management and estate planning. By leveraging borrowed funds to cover life insurance premiums, clients can secure essential insurance benefits without depleting their capital assets, thus maintaining liquidity and preserving their investment portfolios. This approach facilitates tax-efficient wealth transfer and enhances overall estate management.

While taking out life insurance is a common strategy for those who want to provide financial security for loved ones in the event of their death, high-net-worth individuals typically look for policies in the tens of millions of dollars to cover business, inheritance, and other financial assets. Not surprisingly, those premiums are significantly more expensive than the average policy. In fact, life insurance premiums for high-net-worth individuals can easily cost hundreds of thousands, if not millions, of dollars per year.

Premium financing allows life insurance policyholders to leverage borrowed funds to pay for insurance premiums. This enables affluent clients to secure essential insurance benefits without depleting their capital assets and maintain liquidity for new investment opportunities. Premium financing can also prevent the insured from owing capital gains taxes, which is triggered after an investment is sold, because they don’t have to liquidate assets to pay for the premium upfront.

Understanding Life Insurance Financing

Life insurance premium financing, typically obtained as a loan from a private bank or life insurance finance company, is designed to address estate tax obligations effectively. This method can help high-net-worth individuals who do not want to sell assets to pay for premiums and optimize wealth transfer to their children or heirs by using the proceeds from a substantial life insurance policy to cover anticipated costs.

Typically structured within a trust, these policies are kept separate from the rest of the estate, ensuring clarity and efficiency in estate planning. This not only safeguards wealth transfer but also enhances overall estate management by strategically leveraging insurance benefits while preserving and maximizing the value of diverse asset classes within an estate.

Company-owned life insurance is a life insurance policy purchased by a company on behalf of an employee—typically used to fund a variety of plans, including supplemental executive retirement plans (SERPs) and voluntary compensation plans—with the company as the primary beneficiary. The company is responsible for paying the premiums and receives tax-deferred cash values and tax-free death benefit proceeds. This strategy can help companies recover the costs of a deferred compensation program.

Who May Benefit?

Life insurance premium financing is primarily utilized by high-net-worth individuals, entrepreneurs, businesses and their business owners.

High-net-worth individuals, entrepreneurs, and real estate investors use this strategy to maintain liquidity to obtain funding for other investment opportunities without liquidating assets. Business owners might find it useful for funding buy-sell agreements, ensuring smooth ownership transitions, and managing cash flow while securing large policies on executives, as well as estate planning and wealth preservation.

Maximizing Returns, Tax Efficiency and Business Continuity

One key advantage of life insurance premium financing is the ability to use proceeds from the insurance policy to safeguard investments without liquidating other assets or disrupting existing portfolios. This approach also allows individuals to retain control over significant or illiquid assets such as stock holdings or real estate, which could otherwise be encumbered by tax obligations and other financial burdens. It also provides essential liquidity for sustaining business operations or seizing investment opportunities without compromising financial stability.

This strategy preserves capital, maintains current investment strategies, and secures substantial life insurance policies. Other advantages of premium financing include:

• Cost-Effectiveness: Obtaining life insurance coverage with reduced out-of-pocket costs.
• Investment in High-Returning Assets: Keeping funds invested in high-return asset classes.
• Minimization of Gift and Estate Taxes: Reducing the tax burden on transferred wealth.
• Enhanced Estate Internal Rate of Return: Improving the overall return on the estate.
• Additional Asset Accumulation: Building cash surrender value as an additional asset class.
• Risk Management: Providing flexibility in estate planning strategies.

As with any complex financial strategy, consulting with knowledgeable advisors is crucial to ensure that life insurance premium financing aligns with one’s broader financial goals and objectives.

To learn more about the process of obtaining premium financing, types of life insurance policies used, future trends in this type of financing as well as regulatory, legal and risk considerations, contact Byline Bank Senior Vice President Ryan Bird.