How does it work?
While each premium financing arrangement is custom designed to meet your unique financial goals, a premium financing transaction consists of two separate financial instruments: a policy from a life insurance company and a third-party loan.
After securing favorable medical underwriting from a life insurance company, R/P America Life Services arranges the appropriate financing from bulge-bracket institutions or banks. We advise the client so that they are knowledgeable and understand the different lenders' programs so that we can pair the client with the most appropriate and cost-efficient lender.
Indexed Universal Life and/or Whole Life insurance provides permanent life insurance protection and access to cash values that grow tax-deferred. Thus, there are benefits to the insured during his/her lifetime as well as benefits to the insured's estate at death. Typically, Indexed Universal Life (IUL) policies are the product of choice for premium financing due to the flexibility of the product. There are several investment options that can be utilized inside the IUL policy that is geared toward the S&P 500 Index.
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Click below, for an example regarding the function of Indexed Universal Life policies.
In order to keep the proceeds of the policy out of your estate, an irrevocable life insurance trust (ILIT) or other entity such as a business or partnership ("Owner") owns the policy on your life. The lender receives a security interest in the cash value and death benefit of the underlying policy as collateral. The interest on the loan and certain placement fees can also be capitalized. The Owner then borrows the premiums from a third party lender. The policy cash value and other existing assets of the client's portfolio will be required to collateralize the loan. The Owner either pays loan interest to the lender using annual gifts/contributions made to the ILIT or it can be added to the loan. If the interest is accrued, the life carrier or lender may require a level outlay or additional collateral. If the insured dies prior to the loan being repaid, the Owner will receive the estate tax-free life insurance proceeds, net the loan payment. However, it is critical to consider alternative ways of repaying the loan before death to minimize the risk.
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The formula for this process is the following:
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Cash Value + Death Benefit - Outstanding Loan Balance = Payout to the ILIT (Tax-Free)
The ILIT (not the client/insured) is the borrower of the needed financing to fund all the premiums, interest, and expenses of the transaction.
ILIT Structure
Grantor's Heirs or Designated Charity Receives Tax-Free Death Benefit
Insured/Grantor
(Owner)
ILIT
Insurance Company (Death Benefit)
Repays Lending Institution
Client Collateral
The lenders pay the insurance premium each year, but the cash value in life insurance policies takes time to grow. In the earlier years, there is a shortfall of what the lenders paid out in premiums and interest against the cash value equity in the policy. This gap needs to be covered by the clients’ collateral. For example, if a lender paid $500,000 into a client's policy for premiums and interest, but there is only cash value of $200,000, that is a difference of $300,000 that the client needs to post in the form of collateral.
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Contractually, there are three ways the clients collateral can be called:
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The lender originating the financing goes bankrupt.
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The life insurance company that issued the policy goes bankrupt.
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The client goes bankrupt.
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*The lenders are major global institutional money managers and highly rated banks that have been providing this type of financing for decades
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*The life insurnace companies are A+ rated or higher by Moody's and Standard and Poor's and have been existence for over 125-years with a proven track record of performance in all types of financial markets.
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*Clients who participate in premium financing are high net worth individuals approved by both the life insurance carrier and lender. They are underwritten to make sure they have plenty of assets to cover the projected collateral.
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At any point, the only liability the client has is their posted collateral.
The Process (recap)
Step One - The Application for a Life Insurance Policy
Clients will be required to complete an application for a life insurance policy. They will also be required to have a medical exam completed along with having to provide financial underwriting to determine whether you qualify for the policy.
Step Two - The Application to Borrow the Premiums
When the application is being processed by the life insurance carrier, simultaneously we will collect detailed financial information from the client to submit to the affiliated lending network to analyze the client's financial situation and get approval for the premium financing loan. The lenders will also be looking at the type of assets they have to structure the collateral to be used to support the loan. Assuming that both the life insurance company and the lender approve the client's premium financing arrangement, the lending network will deliver funds for the life insurance premiums.