CAN ENHANCE INVESTORS’ CONTROL OF ASSETS
When most people buy a home, they take out a mortgage. By borrowing 70%, 80% or more of the home’s value, buyers can get more house than they could with just their available assets. What if you could protect your assets and preserve your ability to fund investments using same concept of leverage? A well-structured insurance plan can help you do exactly that.
Increasingly, we are finding that business owners and real estate investors are using premium financing for cash-value insurance policies, seeing it as an appealing way to obtain insurance benefits without liquidating other assets.
The basic concept is that instead of paying out of pocket for an insurance policy, business owners and investors can obtain financing to cover as much as 70% of the premium cost. This means they can afford significantly more coverage than they could without leverage.
Consider the hypothetical example of a 50-year-old man who needs key person protection in his business. He seeks cash-value life insurance with $3.6 million in initial death benefit protection. Under a premium financing arrangement, he would pay annual premiums of $100,000 for the first five years only; no further premiums would be due. The bulk of the policy would be funded with a bank loan that would contribute just shy of $100,000 in years 1 to 5, and just shy of $200,000 in years 6 to 10, for a loan totaling $2 million including interest. By year 15, the loan would be repaid from the policy’s investment income. By year 16, the policy would produce supplemental retirement income of $147,000 a year, and the policy continues to accumulate value. The beauty of this arrangement is that it leaves other assets alone, making them available for other investments or for use as collateral.
This, of course, is a very cursory explanation of how premium financing works. Your circumstances must be carefully considered before buying any policy or choosing any financing method. Your results will depend on a number of variables, including policy performance and bank loan terms.
As your trusted advisors, we are ready to educate you on the benefits as well as the risks of premium financing. This approach isn’t right for everyone, but sophisticated, high-net-worth clients with businesses and investments to consider may find premium financing for insurance policies to be an effective way to protect their wealth. To speak with one of our advisors about this and other life insurance strategies, contact Anderson Retirement Solutions at 888-473-6931.