What is Premium Finance (or Financed Insurance)?
At its simplest level, premium finance is using lender money to pay for life insurance premiums instead of using your own cash. The concept has been in use since the 1960’s.
What are the benefits of premium finance?
a) Saves cash flow vs. using your own money
b) Avoids opportunity cost (lost earnings or taking a working asset, liquidating it and using the money to pay for premiums)
c) In estate planning applications it should reduce gift taxes (triggered when paying money into the ILIT)
What is the difference between Premium Finance and NIW’s ABIL (Asset Backed Insurance Lending)?
ABIL is a variation of Premium Finance where the primary focus of the design is long term durability against harsh economic conditions. It is NIW’s contention that most financed insurance will only save clients money in the short term and if the conditions are normal. By contrast, NIW’s solutions anticipate harsh economic conditions and are designed to save money over the client’s life.
The ONLY logic of using financing is to allow the client to keep their cash flow in place while still enabling them to get the insurance they need. Financing should only be used if it will actually save you money. Other alternatives are paying the premiums out of pocket or not purchasing insurance at all and paying the tax or expense out of pocket.
Since all financing has risks, the case for financing needs to be compelling in comparison to out of pocket premiums or the liability exposure the insurance is intended to solve. To learn more about the potential risks and implications of using Premium Finance, click here.
Estate Planning Applications
- Estate planning for those with a net worth of more than $10m
- Succession planning for family businesses
- Creating liquidity or augmenting philanthropic gifts from wealthy families
- Creating new capital inside existing family trusts that are being depleted over time by the needs of the beneficiaries e.g large established family trusts
- Executive Benefit solutions
- Living Keyman/ Buy Sell solutions (where death is not required)
- Informal funding of nonqualified plans
- Informal funding of ESOP buyback provisions