Why use Premium Financing?

Simply put, the leverage available from premium financed life insurance will allow policy owners to acquire substantially more life insurance for a small fraction of the cash flow outlay normally needed to support a large policy. This allows a client to keep other assets to perform elsewhere, but it often produces an attractive tax-free IRR, (internal rate of return) for a relatively nominal out-of-pocket cost.

The optimal plan allows the low-interest payments for the premium to fund the larger early premiums creating a compounding level of cash value growth. The cash value compounding should overcome the low hurdle rate of the premium financing, then the policy itself can absorb the loan using the built-in policy loan feature, in addition to providing the client a substantial financial windfall. The policy distributions can be in the form of supplemental tax-exempt retirement income, a tax-free death benefit to heirs, or both.

Advantages of Using Premium Financing

There are 8 distinct advantages of Premium financed life insurance:

1. Replaces the need for paying wasteful term insurance premium typical of high-income earners during working years.
2. Substantially more cash value compounding in your favor (even if encumbered by the premium finance loan).
3. The ability to keep your other liquid assets deployed elsewhere.
4. Potential for positive arbitrage between the policy’s cash value growth rate and premium financed loan rate. (dependent on actual performance)
5. Potential for supplemental tax-exempt retirement distributions that would be immune from you highest and most penal tax brackets.
6. And/or the existence of a tax-free death benefit outside the estate, which allows the insured to tactically spend down less tax-efficient assets in their estate during their lifetime as well as the ability to utilize other more complex estate planning strategies.
7. The retention of a key employee at a corporation in the form of a retirement income, and legacy benefit.
8. A potential tax write-off to the corporation by funding a policy for a key employee.

Contact the specialists at Pinnacle Financial Services to discuss this specific strategy and others that could benefit your higher-earning clients, as well as those that could benefit from legacy and Estate planning strategies.