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Keep Assets in Place with Insurance Premium Financing By: Michael Graham, Senior Vice President, Insurance Premium Finance Manager
Life insurance – whether you love it or hate it – is important for most people. It can be used in a number of ways including to manage an estate which involves the optimal management of estate tax obligations, as a source of liquidity or income replacement, in business transitions and succession planning, as an alternative investment, and for transferring non-liquid assets. Read on to learn more.

THE ADVANTAGES OF INSURANCE PREMIUM FINANCING

Depending on your anticipated estate tax liability and the amount and nature of the death benefits you want to pass along to heirs, insurance may be a necessary part of your financial plan. Policy premiums can significantly impact your liquidity if paid out of pocket. In many cases, these premiums can be well over $500,000 per year. That’s where insurance premium financing comes in—it’s one of the most cost-effective strategies to help pay for these high premium policies that are used to protect your assets, while creating estate liquidity. Instead of funding premium payments by liquidating investments and incurring capital gains tax, or using existing capital to pay the premiums, a premium financing plan can help you keep current assets in place.
Insurance premium financing is a powerful, tax-efficient way to utilize credit in your wealth planning process. And in a low interest rate environment, you may be able to lock in your rate for several years. Perhaps one of the most attractive features of this financial strategy is the tax benefit of using life insurance proceeds to fund your estate taxes.

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TYPICAL WAYS THIS STRATEGY IS USED 
Generally, those who purchase life insurance take comfort in knowing that they’ve planned for the unexpected, developed an estate planning strategy or helped transition a closely held company to the next generation. With life insurance premium financing funding your policy’s premiums, you can provide future benefits for generations to come without jeopardizing your current cash flow situation or liquidating assets. Here’s how. 

ESTATE PLANNING
Utilizing insurance premium financing allows an estate to maintain its assets rather than drawing on existing capital to pay the premiums. Borrowers like this option because they can invest their capital for a higher return than the cost of financing without having to liquidate assets (e.g., real estate, investments, fine art and collectibles) at an inopportune time.
Financing the premiums rather than paying them out of pocket is a popular strategy for high-net-worth estates to transition existing investment holdings or appreciated assets to the next generation. Most insurance policies used as collateral for insurance premium financing are owned by an Irrevocable Life Insurance Trust (ILIT) created and managed by the trustees of the estate. The ILIT buys and owns the insurance policy. Upon the deaths of the creators of the trust, the policy’s death benefit proceeds are used to pay off the premium finance loan and then disbursed to beneficiaries to settle estate taxes and make other cash distributions according to the terms of the ILIT. 

For example, let’s say you want to leave your real estate holdings to your daughter or son. However, they have their own careers, and don’t want the headaches of managing your properties. You could structure a life insurance policy to cover any debt on the real estate, taking advantage of insurance premium financing. When your child inherits the policy’s death benefit, they could pay off the real estate debt and sell the real estate in its entirety unencumbered by any mortgage. In the alternative, the beneficiaries could take more time selling the properties piece by piece, and not have to resort to a “fire sale.” 

BUY/SELL AGREEMENTS 
If you’re a business owner, the act of transitioning ownership can be a complex process. Your time should be focused on the daily activities of the business. In order to run the business and transition ownership, you’ll need to plan for transition contingencies. One way to achieve the outcome you desire is through life insurance. This advanced planning tool uses the life insurance death benefit as a way to transition ownership to your heirs, beneficiaries of your estate, or key employees. 

For example, you can use the death benefit of a permanent life insurance policy to transition ownership equitably and orderly from one key employee to the next. The death benefit is frequently used to buy the deceased owner’s share of the business. Many insurance carriers have policies designed for this specific reason. Utilizing insurance premium financing becomes a very affordable option allowing current ownership to avoid outside buyers and maintain continuity in the daily operation of the business. 

SUCCESSION PLANNING 
Business owners, especially family-owned businesses, can use financed life insurance policies as a way to transition ownership from relatives, siblings, or one generation to the other. Financing the premium is an affordable option to achieve this conversion as well as offering peace of mind throughout the transaction. Talk with your advisor about the estate tax considerations and how to avoid levering up debt with this option. 

SOURCE OF LIQUIDITY/INCOME REPLACEMENT 
The stress of wondering how bills and other expenses will be paid can create a great deal of worry and stress following the death of a loved one. When this happens, life insurance can be used as source of liquidity or income replacement. 
Insurance premium financing allows this to be achieved more affordably than by paying the premiums out of pocket. By incorporating this option into your estate plan, your loved ones can grow their net worth—and the death benefit will allow them to maintain their current lifestyle. 

ALTERNATIVE INVESTMENT STRATEGY 
For young adults, insurance premium financing can be used as an alternative investment strategy. Perhaps you contributed the maximum amount on your Individual Retirement Account (IRA) and 401(k) contributions and are seeking an alternative to investing in the stock market. You could buy a whole or permanent life insurance policy that accumulates cash value. By doing this at a young age, the policy is more affordable (likely you have fewer medical issues at this point in your life). Financing the insurance premium would keep your cash flow and assets liquid until you reach retirement age, when the cash value on the policy can be used as an alternative investment to supplement your income. 

SIGNIFICANT HOLDINGS IN NON-LIQUID ASSETS 
Similar to owning a business, transitioning ownership in a farm, ranch or investment real estate is an important part of a complex estate settlement. The insurance premium finance death benefit can be used as a means to buy out other siblings who may not have an interest in ownership. The matriarch or patriarch can buy a life insurance policy that contains enough death benefit to purchase the farm or real estate from uninterested siblings, allowing for a fair and equitable transition. 

Of course, there are many other scenarios and ways an insurance policy can be structured and premium financing set up, and each is customized for your unique financial situation. 

NEXT STEPS 
There are many more important considerations pertaining to insurance premium financing and how it can benefit your overall financial plan. Contact Commerce Trust Company today for more information about how our team of advisors can help with this unique and personalized wealth planning strategy. 

The opinions and other information in the commentary are provided as of December 15, 2020. This summary is intended to provide general information only, and may be of value to the reader and audience. 

This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. 

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. 

Commerce Trust Company is a division of Commerce Bank. 

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ABOUT THE AUTHOR

Michael Graham
Michael Graham Senior Vice President, Insurance Premium Finance Manager Commerce Trust Company 
Michael is the manager of insurance premium finance at Commerce Trust Company. He works with clients alongside their assigned private bankers, private client advisors and commercial relationship managers to introduce and structure insurance premium financing options to meet their unique liquidity needs. Michael joined Commerce in 2020 and has close to 20 years’ experience in insurance premium financing and commercial lending.

He earned a bachelor’s degree in marketing from Pittsburg State University. Michael also graduated from the Graduate School of Banking at Colorado. Michael is active in the community having served on the business council of Nelson-Adkins Museum of Art and the boards of Big Brothers Big Sisters of Greater Kansas City and Young Bank Officers of Kansas. 
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