Financial professionals may find that some high net worth clients do not purchase as much life insurance as they should because the clients fear taking liquid assets out of other investments that lead to larger short-term yields. This can be frustrating for financial professionals who want to help their clients meet legacy planning needs.
To ensure that clients purchase the life insurance that they need to provide for family members and build a financial legacy, financial professionals should consider premium financing. This allows high net worth clients to use leverage to purchase the insurance they need without investing liquid capital. For high net worth consumers who want to preserve wealth, premium financing is a way to enhance legacy planning.
Who should use this tool
Premium financing is not for every client, but it is an enormous help to certain consumers. If used correctly, premium financing can reduce out-of-pocket costs for an insurance policy and will have a minimal effect on the client’s current investment portfolio.
This type of policy funding is complex, but the core idea is simple. High net worth individuals take out a loan to pay premiums on a life insurance policy. The policy is held in an irrevocable life insurance trust, which will eventually distribute death benefits to the trust’s beneficiaries. Rather than paying the insurance policy’s premiums outright, the policyholder pays the cost of interest for the loan while the loan proceeds are directed toward the policies’ annual premiums.
Ideal candidates for this type of plan are clients who have a high enough net worth to qualify for the loan and also have liquid assets that would have otherwise have been used to pay the life insurance premiums.
What to watch out for
These policies require extensive planning and must be monitored annually to account for details, such as loan interest due and collateral requirements that are not as meaningful for other life insurance plans. Financial professionals should introduce this option to specific clients who need more life insurance but are unwilling to spend money on this asset.
For these clients, the additional complication introduced by premium financing is worthwhile, because it offers a way to get the insurance they need without significant upfront spending. Other clients who have yet to purchase life insurance or who have adequate liquid assets to pay premiums without disturbing their larger investment strategy may be better served by the simplicity of paying premiums out of pocket.