Life insurance is undoubtedly one of the most important policies for individuals and businesses. However, when it comes to the financing of the insurance, many people have doubts whether to use their current cash flow or existing assets as a refinancing strategy. A good example is when you have the cash, but you would rather spend it on other things. Another example is if you have liquid assets, such as real estate, stocks, bonds or business assets, but you are not inclined to access them in order to purchase your life insurance. This is where premium financing comes in to help you pay monthly instalments for your life insurance, as opposed to paying a lump sum all at once.
Premium financing can be an ideal solution whether your life insurance is designed for philanthropic purposes, estate funding, or business planning. It allows you to control funds borrowed from commercial lenders with the aim of accessing the lump sum of money you need without being hindered from acquiring, preserving or growing your assets. Premium financing helps both companies and individuals to spread their total insurance costs thus being able to budget their finances in a more effective manner.
How does premium financing work?
Normally, the client should receive clear communication from the funder in order to prepare for this step-by-step process. The first step is to establish whether the client really wants life insurance, and then decide on the mode of payment that they need to adopt. This step is always significant because it helps establish whether financing is a workable option.
Once this is established, the second step is preparing the client’s documents, such as financials and a medical summary, to be dispatched to the carriers. The client should then provide all his or her financial documentations to the funders, which are usually separate from what the carriers are furnished with. In most cases, carriers only request personal financial documents, but funders almost always demand to see the client’s tax returns, as well as the authorization to run a credit check.
Many insurance brokers will then present the case to both the insurance company and the funders with the aim of obtaining the best financing premium terms possible. At this point, case design will come into effect. When working with premium financing, the term “case design” normally refers to the duration of the loan.
As soon as the financing companies start making their offers, certain details will be included, such as how long they will be financing the policy, its current interest rates, points or fees being charged on top of the interest (including fees) and any additional requirements.
A case in point is where some funding companies place a requirement for the clients to establish a trust with a particular design or in a particular state. In addition, they might ask the client to put a specific trustee in place. Once the application has been accepted and the funding approved, the client and the agent will then commence with the next level of the application procedure. This process is where the funder releases the money to the carrier, normally through a wire transfer. Then the policy will be in effect and fully funded. It is at this stage that the policy is released.
Some of the benefits associated with premium financing include:
You do not need to pay the broker a lump sum for your insurance premium.
It allows you to budget your monthly expenditures more effectively.
Helps avoid or minimize gift taxes
Offers alternative options – if you have exhausted your unified credit or your yearly gift tax exclusion, then premium financing is a great option.
The financing helps you avoid the urge to dispose of your securities at a low price in order to raise the required funds for paying your life insurance. It also helps you hold onto your assets.
Who can benefit from this financing arrangement?
Wealthy individuals with the intention of buying life insurance cover to leverage tax and value repayment for private estate planning.
Business people with no intention of using their existing assets, but do intend to fund buy-sell agreements, executive benefits or key person insurance.
You can save on your taxes by taking advantage of your credit power for paying life insurance premiums while being able to keep your asset options available for other opportunities. Additionally, paying your life insurance premiums using borrowed funds lowers your out-of-pocket expenses.
You can ask your life insurance agent, or visit our site, for more explanation and advice. We have been working with insurance companies for sometime.
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