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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Financing

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.  Additionally, there is minimal to no impact on the client’s current investment portfolio, allowing for maintained control over and use of assets that would otherwise be liquidated in order to pay life insurance premiums.

 

The gift tax annual exclusion allows each individual to give up to $13,000 per year (indexed annually to account for inflation and subject to specific rules) to an unlimited number of people without paying federal gift taxes.

 

Trusts should be drafted by an attorney who is familiar with matters such as these in order to take into account income and estate tax laws (including generation-skipping tax).  Failure to do so could result in unnecessary adverse tax treatment of trust proceeds.

 

How is Premium Financing Used in Estate Planning?


Estate Liquidity—Premium financing is able to be used in concert with estate planning if your goal is to obtain a large amount of life insurance for purposes of estate tax liquidity.


Business Planning—Premium financing can be used by businesses in a number of different ways.  Specifically, a business can borrow funds to obtain life insurance for key person coverage, finance a nonqualified deferred compensation plan, implement a death benefit only plan, or gain coverage for a buy-sell arrangement.


Need for an Exit Strategy for Premium Leveraging Arrangements—There are inherently certain risks involved in premium leveraging arrangements, such as interest rate uncertainty (loan arrangements), increasing economic benefit costs (split-dollar arrangements), and decreasing net death benefits due to the collateral assignee’s increasing interest in the policy.  A well-planned exit strategy provides an effective way to terminate a premium leveraging arrangement by providing the funds necessary to repay the debt while maintaining your desired level of insurance protection.  However, in wealth transfer situations, creating an efficient exit strategy can be difficult due to the potential consequences with respect to gift tax.


Obtaining Additional Gifting Leverage for Exit Strategy—Combining any of the popular exit strategies with other estate planning techniques, such as a family limited partnership (FLP), can significantly increase leverage and reduce value of the taxable gift.  By incorporating assets that are subject to valuation discounts due to lack of marketability and/or lack of control (e.g., FLP interests, limited liability company interests, or non-voting stock) into the exit strategy, you can effectively increase the value of the remainder interest by 40-100 percent in comparison to exit strategies utilizing transfers of assets not subject to valuation adjustments.

 

Highlights


The death benefit payable to the ILIT should pass to trust beneficiaries both and estate and income tax-free.

 

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

 

Reduction in net out-of-pocket cost for the life insurance.

 

Minimal to no impact on current investment portfolio so that client is able to maintain control over and use of assets that would otherwise have been liquidated to pay life premiums.

 

Potential for leveraging of client’s investment portfolio in instances where portfolio returns exceed cost of the loan.

  

*Premium Financing is complex and involved by many risks, such as the possibility of policy lapse, loss of collateral, interest rate and market uncertainty, and failure to re-qualify with the lender to keep the financing in place and maintain the desired level of insurance protection.  Financing is subject to the lender’s collateral and financial underwriting requirements.  Financing lenders typically require additional collateral during the early years of a policy in the form of cash, cash equivalents, marketable securities, a personal guaranty, or a letter of credit from a bank approved by the lender.  Interests in closely held businesses and real estate are not generally considered acceptable collateral.  In certain situations, additional out-of-pocket contributions may be required to retire the debt and/or maintain the desired level of insurance protection.  Insurance proceeds are lessened by the loan amount and any required level of coverage should take this fact into consideration.

 

Private Financing


Private financing is a fair market loan arrangement between a client and an irrevocable life insurance trust (ILIT), one in which the client loans the premiums or a life insurance policy on the client’s life to the ILIT.  In that case, the gift to the ILIT, if any, is equivalent to the amount of loan interest charged and is not equal to the entire policy premiums.  As a result, the client is able to gain a needed life insurance death benefit outside their estate with minimal cash flow and/or transfer tax impact.


Private financing premiums can make great economic sense when there is a positive arbitrage between the policy’s internal rate of return or the trust’s investment return and the loan interest rate.

 

Highlights


The death benefit payable to the ILIT should pass to trust beneficiaries both and estate and income tax-free.

 

Minimization of transfer tax cost associated with acquisition of client’s preferred level of life insurance protection.

 

Flexibility and attractiveness of loan terms (e.g., loan has option of being demand, made annually or in upfront lump sum, loan interest paid current or accrued, payable on death and interest rate based on AFR).

 

Loan interest that is paid to the client is exempt from income tax if the ILIT is a grantor trust (i.e., client treated as owner of all ILIT assets for federal income tax purposes).

 

Not subject to third-party lender’s approval or strict collateral requirements.

 

Zero risk of loan being called by third-party lender.

 

Private Split Dollar*


Would you like to acquire more life insurance outside your estate without incurring gift tax? 
As do many wealthy clients, you understand the benefits that life insurance can provide.  However, the premium costs for your desired level of life insurance protection may exceed your annual gift tax exclusion and remaining lifetime gift tax exemption amounts.  In that case, acquiring more life insurance would be likely to result in a significant gift tax.

 

Are you reluctant to incur debt from a third-party lender? 
As is the case with all commercial lenders, premium financing lenders have stringent financial underwriting and collateral requirements.  Premium financing borrowers are required to undergo rigorous financial scrutiny from the lender, pledge collateral in addition to the policy itself and, in some cases, the loan is at risk of being called by the lender.

 

Do you own assets that do not qualify as collateral for third-party premium financing purposes? 
Premium financing lenders normally require you to provide additional collateral during the early years of a policy in the form of cash, cash equivalents, marketable securities, a personal guaranty, or a letter of credit from a bank approved by the lender.  Interests in closely held businesses and real estate are not generally considered acceptable collateral.

 

Is it possible to fund your life insurance premiums with minimal gift tax impact AND avoid incurring debt from a third-party lender? 
Private split dollar can potentially be a cost-effective approach to acquire your needed death benefit while simultaneously maintaining your privacy and avoiding the need to pledge additional collateral.

 

*Split dollar agreements are complex and involve tax and legal considerations.  Please consult with appropriate counsel before entering into such an arrangement.  National Financial Partners Corp., its affiliates and subsidiaries do not offer tax or legal advice.