Life insurance premium financing is a valuable tool for individuals who need life insurance but don’t want to tie up capital. Here’s a look at one of our most successful cases that may provide insight into the true benefits of life insurance premium financing.
We recently had a client navigating a problem that is far too familiar: a successful business owner with multiple children, only one of which plays an active role in the family business. Ready to step back, this business owner and family patriarch established his business succession plan with his son, but the estate plan was more complicated. Since much of the family wealth was tied into the business, how would the father provide each of the non-participating children their fair share?
One option would be to sell the business at death and divide the proceeds amongst the siblings. Another would be to split the current value of the business, and require the participating son to purchase the ownership interest from his siblings. But, both options could create disruption, cash flow hardships, and family discord.
By establishing a life insurance plan, the patriarch could ensure that each of his non-participating children would receive an equal amount of the family estate without disrupting the business. This could be done through one or multiple policies with ownership through a trust, the family business, or the patriarch himself. The flexibility this affords means that the father was able to customize the plan to the particular family dynamic. But, a life insurance plan has a premium expense, and the next question is, what’s the best way to pay the premiums due?
The client’s premium payment was going to be larger than the annual gift tax exclusion, and he didn’t want to drain their unified credit. He also had enough other needs for cash flow that paying the large premium just didn’t make sense. That’s where premium finance came in. Rather than tie up funds with the premium, the client was able to use financing and keep money accessible. In every possible scenario where life insurance is a solution to an estate equalization problem, premium finance offers a way to pay.