Life insurance, given that it could provide tens of millions of dollars tax-free at someone’s death, should warrant the same consideration and attention as any high-value asset. As such, financing the premiums for a large acquisition of life insurance should be considered.
Many families use life insurance as an asset to provide liquidity for a variety of reasons, including family protection, wealth transfer or charitable giving. When it comes time to make a new acquisition of life insurance, these families can choose among a variety of life insurance products.
Term insurance is low cost and allows for large policies to be acquired for a relatively low premium payment. The downside is that term insurance is temporary, and less than 10% of all term policies ultimately pay a death benefit.
Universal and whole life products
Universal life and whole life products provide permanent coverage and contain a cash value component. The amount of premium required to maintain a permanent policy can vary greatly depending on the amount of risk a policy owner chooses to assume. Guaranteed products cost up to 20% more than non-guaranteed products that depend on cash value performance to carry the death benefit to maturity.
While much thought goes into to choosing the right life insurance product, many families fail to consider alternative options to pay for their policies, often opting to pay premiums out of current income or from the liquidation of assets. Using a commercial bank loan to finance premiums for a permanent life insurance policy has become increasingly popular during the decade-long run of low interest rates. Yet many affluent families are not presented with this option, presumably because of the sophistication and ongoing management required for a premium financed life insurance portfolio to be successful.
Paying loan interest or partial loan interest on premiums paid, versus actually paying the premiums can potentially double the yield on the overall plan. For example: a 45-year-old with a 40-year life expectancy pays $60,000 per year for a $10,000,000 permanent policy. The tax-free rate of return on the death benefit is 6%. Whereas, financing the premiums and paying partial loan interest can produce a return in excess of 12%.
A few factors to be aware of when considering premium financing:
- It requires annual management of the loan and life insurance policy. At some point, there may be enough cash value in the policy to repay the bank loan and maintain the death benefit.
- Liquid assets are available to post as collateral for the loan in the early years. The life insurance cash value serves as the primary collateral for the loan; however, in the early years additional collateral is often needed.
- Loan interest rates and policy performance are not guaranteed. Therefore, market and interest rate risks do exist. This is why professional management is important.
In summary, many successful families believe that active versus passive management of their most valuable assets yield higher returns. Life Insurance is no different. Existing policyholders should have their life insurance reviewed by a licensed agent every few years. If new insurance is being considered, make sure that your life insurance agent provides multiple product and funding options and that they have the capabilities to provide ongoing reviews and service.
Life insurance can provide significant returns when managed properly, and it is up to the policy owner to choose a life insurance professional who is capable and can provide long-term guidance.
For more information regarding premium financing or to schedule a complimentary policy review please visit: oswaldlife.com/contact-us/.
Founded in 1893 and employee-owned, Oswald is one of the nation’s largest independent insurance brokerage firms. As a partner of Assurex Global, the world’s largest association of privately held insurance brokers, our risk management professionals service and support the needs of our clients worldwide.
As managing director of Oswald Specialty Life and executive vice president of Oswald Companies, Wasserman brings decades of experience in financial services, life insurance, estate planning, business succession planning and charitable giving. He combines this expertise with a personalized consulting approach. To connect with him, visit oswaldcompanies.com/jeffreywasserman.