Premium Financed Insurance Transactions

If you are nearing 70 years of age or older and have significant assets, then you should investigate using the one asset you have yet to capitalize on, your good health.

Quick History of Premium Financed Insurance
Some years ago when people had life insurance policies but were ill and cash poor they began selling the life insurance policies to investors for cash.  This led to an enormous secondary market for life insurance policies.  Investors purchase the policies, bundle them together in portfolios with a specified Internal Rate of Return and resell them as securities.

The sale of a life insurance policy is referred to either as a “Viatical” or a “Life Settlement” depending on how close you are to death at the time.  Each state regulates this market according to its own laws.

Since life insurance policies now have a large secondary market and are fairly liquid, banks are sometimes willing to loan the money to pay the premiums on large life insurance policies and take the policies as collateral.  Some additional collateral may also be required.

Real Kansas Example of how it works
This is a true example but the industry and the names have been changed.

Bert had a farm and other hard assets worth nearly $20,000,000.  After all of his estate planning was complete it look like Bert’s estate would owe about $4-$5 Million in estate taxes at Bert’s death.

Bert set up an ILIT which went to a large bank and got a loan to pay the insurance premiums on a $20,000,000 Life Insurance policy.

When Bert dies, the insurance policy will pay off the bank loans plus interest and the remainder will go into trusts for his beneficiaries tax free.

The beneficiaries will then have the liquid assets to pay the estate taxes and they won’t have to sell the farm.

The best thing is that Bert had absolutely zero out of pocket expense to obtain this protection.  He was trading on his good health.

This is a way to capitalize on your Life Expectancy.  To pass up at least investigating this powerful Advanced Legal Planning tool would be like deciding not to pick up the dollar you see lying on the ground next to your feet.  Pick it up!  It costs absolutely nothing!

Risks of Premium Financed Insurance
These types of policies have been the center of a lot of controversy in some circles.  As with any business transactions there are risks.

Advanced Legal Planning, LLC has experience reviewing these transactions, evaluating the risks, and where possible mitigating those risks.

Types of Risk
Some of the risk historically associated with Premium Financed Insurance comes from abuses of the system.  Some of those same old abuses exist today.  An easy way to avoid these abuses is to work with knowledgeable and ethical professionals who place their client's interests ahead of their own.  If you ever receive an offer to pay you an up-front fee for allowing someone to insure your life, you can bet this is one of those risky policies that life insurance companies and politicians are fighting against.  You don't want to get harmed in that battle

Currently the primary concern of most practitioners who say that Premium Financed Insurance is "always" too risky is the concern that the insured will outlive their actuarial life span.  If the numbers are too close or interest rates go up, it is possible that the ILIT holding the insurance policy may owe more than the total death benefit on the policy.  The same risk exists if you are paying for the policy yourself.  You could end up paying more (perhaps much more) than the value of the death benefit.  However, with Premium Financed Insurance much (and in some cases all) of the risk is shifted to the institution funding the life insurance policy.

Exit Strategy
With any business transaction, it is wise to have an Exit Strategy.  If you, your Trustee, or the funding institution think you will live too long and the life insurance policy will not have sufficient value to satisfy the loans supporting it, there is a way out.  Remember, the reason the bank or other funding institution is willing to loan you millions of dollars over your life expectancy is because they know that if the need to they can claim their collateral and sell it on the secondary market.  When this is done, either forced by the bank or as a hedge by the Trustee, any remaining profit from the sale after the loan is paid off goes to the beneficiaries of the ILIT holding the policy.

There are some financial planners and attorneys who would argue that you can't know that the policy will sell for enough to satisfy the loans.  Well, that is true, but you also can't be sure that you can sell your IBM or Microsoft stocks either.  In other words, the Life Settlement market is large enough and stable enough that the risks are minimal. 

Complex calculations must be performed using sophisticated actuarial software to see if Premium Financed Insurance is a possibility for you.  Let us help you evaluate whether you can make use of this powerful Advanced Legal Planning tool.