Most life insurance policies are purchased with the primary goal of providing financial protection for loved ones in the event of the policyholder’s death. However, life insurance can also be used as a tool for advanced estate and gift planning. By using a technique called life insurance premium financing, individuals can use life insurance to create a legacy or make significant gifts to charity, without depleting their other assets.
One common use of life insurance is for estate planning purposes. This involves using the death benefit from a life insurance policy to help pay for expenses related to one’s death, such as providing liquidity to pay estate taxes.
Life insurance premium financing is a strategy that uses life insurance as collateral for a loan. The loan proceeds are then used to pay the life insurance premiums. This allows the policyholder to leverage the death benefit of the policy to create a larger estate or make charitable gifts, while still maintaining control of the policy during their lifetime.
There are a few different ways that life insurance premium financing can be structured. One common method is to borrow the premium from a third-party lender specializing in premium financing life insurance. The borrowed premium is then used to pay the premiums on the policy, and the death benefit will be paid out to the beneficiaries when the policyholder dies.
Oftentimes, a premium financed life insurance policy will be owned by an irrevocable life insurance trust or ILIT. The ILIT will be both the owner and beneficiary of the policy. Using an ILIT keeps the death benefit from being includable in the overall value of the insured’s estate.
The insured is able to name the beneficiaries of the irrevocable life insurance trust to make sure the policy death benefit is distributed to their heirs in an appropriate manner.
There are a few things to keep in mind if you’re considering using life insurance premium financing for estate planning purposes. First, it’s important to make sure that the life insurance policy is properly structured so that the death benefit will go to the intended beneficiaries. Second, you’ll need to make sure that the loan repayments are made on time; if not, the loan could end up being more expensive than it’s worth.
It is also important to make loan interest payments to the lender. Otherwise, the loan will go into default and the lender can call the loan. This will typically result in the policy lapsing leaving the insured without any life insurance coverage.
Life insurance premium financing can be an effective way to create a legacy or make significant gifts, without depleting other assets. However, it is important to work with a qualified financial professional to ensure that the loan is structured properly and that the life insurance policy is adequate to cover the costs of the loan.
Overall, using life insurance premium financing for estate planning can be a helpful way to provide for your loved ones after you’re gone. When properly structured it can be a great way to provide immediate liquidity upon the passing of the insured or insureds.