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Interest rates may be adjusted annually or may be a fixed rate
Size of premium usually impacts spread on interest rate
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Repayment Options
In many cases, the loan will be repaid from the policy death benefit
The loan can also be repaid during the insured’s lifetime from the policy cash value and/or a side fund of cash
Partial or full repayment of principal can be made – no prepayment penalties
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Trust is the policy owner
Lender Insured/Grantor of Trust
Manulife New York Life Insurance Policy
Grantor’s Heirs
Irrevocable Life Insurance Trust (ILIT)*
Grantor makes gifts to trust to pay interest.
Heirs receive trust proceeds.Trust receives
death benefit free from estate and income taxes.
Trust pays interest to Lender
Lender funds premium
*Trust should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws, including generation skipping tax. Failure to do so could result in adverse treatment of trust proceeds.
Premium Financing Flowchart
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Self-Financing
Premium financing can also be done privately with the insured, a family member, or the insured’s corporation
This is a hypothetical illustration and is not intended to project actual performance. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed.
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Example #2: Key Person Insurance (Kevin Arnold)
Founder and CEO of his company.
Business has significant real estate but limited disposable cash.
Company needs to buy a $12 million key person policy on Kevin (age 48) with a premium of $150,000 annually for 20 years.
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The Solution: Premium Financing
The company considered purchasing a 20-year term policy.
Kevin does not plan on retiring anytime soon.
The company is also looking for a way to supplement Kevin’s retirement income.
Interest rates are at an all time low.
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The Numbers
The Company will take out a loan of $150,000 a year for 20 years.
The loan will be paid off in year 21 from the company’s retained capital account.
In year 21 the potential cash value available for supplemental retirement income is $4,429,272.
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Premium Financing v Term
Premium Financing Term Insurance
Annual Interest rate may be lower than annual term cost.
Low annual premiums.
Premiums will generally remain level.
After level term period the amount to pay the premium increases significantly.
Once loan is paid off, the cash surrender value is available to supplement retirement income.
No cash surrender value.
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Example #3: Split Dollar Rescue (Susan King)
Susan needs to terminate her existing split dollar arrangement.
At age 78, term costs are very high and the split-dollar rules are changing in 2004.
She can use financing to pay off the “rollout amount,” and then do a 1035 exchange with premium financing.
The "Replacement" of existing policies should only occur when it is demonstratively in the best interest of the client and in compliance with all applicable state and Company requirements. You may incur acquisition costs and there may be surrender costs deducted from your policy or contract.
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Split Dollar Example
Susan can apply for financing to cover the rollout amount and replace the split dollar arrangement with premium financing to minimize her gift tax costs (1035 exchange).
She needs to maintain a policy with a $20,000,000 death benefit.
The same concept can be applied to clients with large loans on large whole life policies.
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Here are the Numbers
Financing for premium and rollout payoff is $3,973,577 in Year 1.After the first year, premiums of $1,146,039 are paid for the next 10 years.Susan can defer interest payments for 5 years internal rate.In year 11, she can use the retained capital account to start paying off interest.The death benefit can be used to pay off the loan principal.
This is a hypothetical illustration and is not intended to project actual performance. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed.
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Example #4: Gift Tax Leverage (Lucy Boyle)
Lucy, age 82, needs to buy a $20,000,000 policy.
Premiums are $3,393,468 for 4 years.
She can pay interest annually and significantly reduce gift tax and out of pocket costs.
The loan can be repaid from the death benefit.
This is a hypothetical illustration and is not intended to project actual performance. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed.
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For more information on Premium Financing, please call your local Manulife New York Representative, or the Advanced Markets Group at(800) 743-5542, option 5