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Your Vision · Our Team

Premium Finance Life Insurance

One of the more interesting developments in the last few years has been the opportunity for more households and business owners to take advantage of a strategy which includes bank financing for funding life insurance premiums. The reason why bank financed life insurance is so attractive is that a policy holder will gain the advantage of using other people’s money (sometimes referred to as OPM or by the term “leverage”) to help them increase their wealth, protection, and tax-free income. Sounds almost to good to be true, right? That is what I hear from a lot of people. However, when we break down how it works, it makes perfect sense. Consider what happens when you take a mortgage out to buy a house. What are you doing? You are using other people’s money (the bank) to finance the purchase which allows you to get a more expensive property than you could afford if you were paying for it without financing. Premium financing life insurance works similarly.  When considering a premium financed life insurance policy, it is important to become familiar with how it works and understand how it fits into your plan.

 

What you need to do:

Commit to a premium payment for (usually) 5  years, with an annual premium of at least $25,000 (premium will be dependent on age, health, insurance needs, and insurability factors).  

 

What the bank does:

Matches a portion of, or an equal amount of, the premium payment for the 5-year period that the client is paying for the policy, then the bank pays another 5 years for a total bank commitment of payments for 10 years.  

 

What’s in it for you:

Because the additional premium payments are being made by the bank, more cash value and death benefit builds as part of the policy. After a period, typically 15 years, the bank loan is paid off by the cash value built up in the policy, which is used as the collateral for the bank loan. After the loan is paid off, the remaining cash in the policy, and other benefits such as the death benefit, are yours as an integral part of your financial plan. Financial planning benefits of a policy like this can be: tax-free income, guaranteed lifetime income, access to living benefits for illness and injury, or as means to pass money on to your loved ones or charity. It can be a great 401K alternative or Roth IRA alternative.

 

What’s in it for the bank:

Because the cash value in the policy serves as the collateral for the bank loan, it is a very safe loan for the bank. So, it is easy money for the bank.

 

Why it works so well:

With interest rates at historic lows, it is a great time for leverage. For example, if the cash value in the life insurance company is averaging a 5.5% interest credit over time, and the loan interest charge from the bank is 3.0%, the difference is 2.5%, so this works favorably for the build up of cash in the policy.

 

There are some restrictions on who can participate.

  • Companies who offer premium financed life insurance generally require a minimum household annual income of $100,000 supported by 2 years tax returns and proof as to how you will pay the annual premiums.
  • There needs to be a need for the life insurance (what is the purpose for the death benefit)?
  • You need to be healthy enough to qualify.

 

This article is not all inclusive.

What I described in this article is general in nature as to how this strategy works. There are variations involving higher net worth, higher annual incomes, risks, or different lengths in years of payments

 

Check it out.

If you are looking for ways to secure your retirement planning, and you qualify for this strategy, it is important that you check this out. Contact us today to see if Premium Financing Life Insurance makes sense for you.

 

Written by: Jay Weyers, CFP®

weyers_jay@nlgroupmail.com

815-455-5292

Weyers McKeever Financial Partners

Your Vision · Our Team

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This is not a solicitation of any specific insurance policy.

Guarantees are based upon the claims paying ability of the issuing life insuerance company.

Living Benefits may be provided by optional Accelerated Benefits Riders.

Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless you also have a need for life insurance. Riders are optional, may require additional premium and may not be available in all states or on all products.

Payment of Accelerated Benefits will reduce the Cash Value and Death Benefit otherwise payable under the policy. Receipt of Accelerated Benefits may be a taxable event and may affect your eligibility for public assistance programs. Please consult your personal tax advisor to determine the tax status of any benefits paid under this rider and with social service agencies concerning how receipt of such a payment will affect you.

Policy loans and withdrawals reduce the policy’s cash value and death benefit and may result in a taxable event. Withdrawals up to the basis paid into the contract and loans thereafter will not create an immediate taxable event, but substantial tax ramifications could result upon contract lapse or surrender. Surrender charges may reduce the policy's cash value in early years.

It is possible that coverage will expire when either no premiums are paid following the initial premium, or subsequent premiums are insufficient to continue coverage.

Guarantees are dependent upon the claims-paying ability of the issuing company.

The ability of a life insurance contract to accumulate sufficient cash value to help pay expenses or meet accumulation goals will be dependent upon the amount of extra premium paid into the policy, and the performance of the policy, and is not guaranteed.

Life insurance income riders typically have limitations and restrictions to exercising them, including but not limited to, minimum and maximum age requirements, years policy has been in force and minimum policy values.

Receipt of other policy benefits that reduce policy values may also reduce the ability to exercise the income rider.

Receipt of income benefits will reduce the policy’s cash value and death benefit, may reduce or eliminate the availability of other policy and rider benefits, and may be taxable.

Chronic Illness and Covered Chronic Illness riders allow for the payment of a portion of an insured’s death benefit, on a discounted basis, if the insured is Chronically Ill. A chronic illness is defined as one that leaves you unable to perform, without substantial assistance, two of the six normal activities of daily living for a period of at least 90 consecutive days due to a loss of functional capacity or requires substantial supervision to protect oneself from threats to health and safety due to severe cognitive impairment. The six activities of daily living include bathing, continence, dressing, eating, toileting, and transferring. There is no additional premium for this rider.

ABR Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless you also have a need for life insurance. Receipt of benefits may reduce or eliminate the availability of other policy riders and benefits. Benefits available are calculated at time of claim based on the age of the policy and our expectation of your future mortality. The amount of Accelerated Benefit available will depend on your life policy’s death benefit value when ABR benefits are claimed. For policies in good standing, if ABR benefits are not used, policy death benefits and other rider benefits are still available.

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP® in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.

CFP® professionals are held to strict ethical standards to ensure financial planning recommendations are in your best interest. What's more, a CFP® professional must acquire several years of experience related to delivering financial planning services to clients and pass the comprehensive CFP® Certification Exam before they can call themselves a CFP® professional. (http://www.letsmakeaplan.org/why-choose-a-cfp-professional)

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