Comprehensive Capabilities

  The foundation of AWP Life Brokerage is the belief that firms are strengthened by the ability to work in tandem as a unified consortium.  Our specializations include insurance concepts and...


Industry Leader

  AWP has proven continual leadership in delivery of benefits solutions for companies of any size as well as we continue to be a leading enterprise in life insurance planning and...


Institutional Relationships

Institutional accounts are integral to our overall distribution plan.  We define institutions as banks, wirehouses, regional broker dealers, and CPA networks. AWP has acquired recognition as a player in the institutional...


Pioneering Captive Insurance

Introduction Despite the fact that the concept of “captive” traces its origins to the beginnings of formalized trade, many people believe captive insurance companies to be a relatively new phenomenon.  Formed...


Premium Financing

Many affluent clients are aware of the benefits that life insurance can provide.  However, clients often harbor concerns that a substantial income tax liability will result from liquidating low basis...


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Premium Financing

Many affluent clients are aware of the benefits that life insurance can provide.  However, clients often harbor concerns that a substantial income tax liability will result from liquidating low basis assets to pay premiums and/or that buying life insurance will force them to redirect assets from potentially lucrative investments.  In addition, the premium costs for the needed death benefit often exceed the client’s annual gift tax exclusion as well as remaining lifetime gift tax exemption amounts.  In result, many clients opt to make use of premium leveraging arrangements, such as Premium Financing, Private Financing, and/or Private Split Dollar, to facilitate funding of their life insurance premiums with little or no gift tax and/or cash flow impact.


What is Premium Financing?

Premium Financing is a strategy aimed at assisting clients in obtaining life insurance for which they have an established need.  Typically, Premium Financing is a fair market loan arrangement between a commercial lender and an Irrevocable Life Insurance Trust (ILIT) in which the lender loans the premiums to the ILIT in exchange for a life insurance policy on the client’s life.  In cases such as these, the gift to the ILIT is equivalent to the amount of loan interest charged as opposed to the entire policy premiums.  Thus, the client is afforded acquisition of the death benefit needed with little or no gift tax impact.


With respect to the specific loan terms, the policy most commonly serves as the primary collateral for the loan.  During a policy’s early years, cash surrender values are generally less than premiums paid.  As such, clients are usually required to provide additional collateral.  Loan interest can be paid annually or alternatively deferred for a period of time.  During the client’s lifetime, loan principal, including any accrued interest, may be repaid from life insurance proceeds or from other sources.  Potentially, a return of premium rider can itself be used to repay the premium loan without detracting from the death benefit needed.  In summary, Premium Financing poses advantageous economic sense in cases where there is a positive arbitrage between the policy’s internal rate of return or the trust’s investment return and the loan interest rate.


Advantages


- Death benefit payable to the ILIT ideally passes to the trust beneficiaries estate and is income tax-free.

- Substantial reduction or elimination of gift tax cost associated with client’s desired level of life insurance protection.

- Reduced net out-of-pocket cost for the life insurance.

- Minimal or no impact on the current investment portfolio—Client maintains control over and use of assets that otherwise would have been liquidated to pay life premiums.

- Potential to leverage client’s investment portfolio when portfolio returns exceed cost of the loan.


Disadvantages


- Complex and involves many risks, such as the possibility of policy lapse, loss of collateral, market and interest rate uncertainty, and potential failure to re-qualify in order to maintain financing and desired level of insurance protection established prior.

- Subject to lender’s collateral and financial underwriting requirements.

- Loan interest paid by the ILIT is not deductible.

- ILIT asses may be insufficient to pay premiums, loan interest, and/or repay lender.

- Pledged collateral and, in certain situations, additional out-of-pocket contributions to the ILIT may be required to retire the debt and/or maintain desired level of insurance protection.

- Well-planned exit strategy must be in place from the beginning.