A Strategy for Financing Life Insurance Policy Premiums Efficiently

The death benefit from a high-value life insurance policy can provide the liquidity needed to pay estate and transfer taxes at your passing and/or serve as a means for a smooth transition of your estate or business ownership. Because the premium for a high-value life insurance policy can exceed hundreds of thousands of dollars, borrowing as a strategy to finance premium payments can help avoid adversely impacting your current cash flow or lifestyle. It can also prevent disruption to an investment portfolio. Insurance premium financing can reduce the need to liquidate investment assets, thereby triggering a taxable event or giving up potential future growth of those assets to make the premium payments.

Advantages of Utilizing Insurance Premium Financing

Employing insurance premium financing allows you to preserve liquidity by only paying interest on the loan to finance the policy premium payments rather than paying the full premium amount out of pocket.

At Commerce Trust, our team of seasoned insurance premium financing specialists in private banking understands the intricacies of life insurance premium financing, structuring each lending solution to fit the client’s unique needs and wealth goals.

Estate Planning

Utilizing insurance premium financing allows an estate to maintain its assets rather than drawing on existing capital to pay the premiums. Borrowers may prefer this option because they can invest their capital for a higher return than the cost of financing without having to liquidate assets at an inopportune time (e.g., real estate, investments, fine art and collectibles).

Financing the premium payments rather than paying them out of pocket is also a 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 death of the insured, 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.

Business Succession Planning

The process of transitioning ownership of a business can be complex, particularly for family-owned enterprises. The benefit from a high-value life insurance policy can be used to supplement a transfer of ownership to your children or beneficiaries. Financing the premium can be an affordable option to achieve this conversion as well as offering peace of mind throughout the transaction.

In businesses with multiple owners, a buy-sell agreement, that outlines a plan for what happens given the potential departure or death of one of the owners, can be paired with life insurance to create future liquidity in the face of an unexpected event. Businesses can implement an additional layer of efficiency through insurance premium financing, reducing the current cash outlay on their balance sheet.

Cash Flow Management

High-net-worth individuals and families may find that paying premium payments outright could impede their ability to deploy cash for other opportunities that could create a potential return. Rather than surrender the policy, they can keep the life insurance policy in place and choose to finance the future premium obligations, freeing up additional liquidity.

Instead of making premium payments out of pocket, financing the premiums allows you to pay solely the interest on the loan while keeping the policy in place. By paying much less upfront, you can free up funds for other ventures.  

Next Steps

There are potential benefits and risks to consider in any borrowing strategy. Contact our insurance premium finance team in The Private Bank at Commerce Trust to learn more about how a life insurance premium financing strategy may fit into your wealth management plan.

The Private Bank at Commerce Trust is a business unit of Commerce Trust, a division of Commerce Bank, Member FDIC.

The opinions and other information in the commentary are provided as of February 28, 2024. 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 is a division of Commerce Bank. Investment Products: Not FDIC Insured / May Lose Value / No Bank Guarantee