Premium Financing Case Study

Premium Financing is a leveraging technique primarily used by high-net-worth individuals needing substantial life insurance coverage but would like to acquire coverage without giving up the current use of assets invested in their business or portfolio. While effective in the right circumstances, it is crucial for clients to understand all the variables involved and how potential changes can affect these arrangements.

Recently, we assisted a valued client in navigating a life settlement as their exit strategy for a premium-financed policy. At age 67, the client’s Irrevocable Life Insurance Trust (ILIT) implemented a $3M life insurance policy for estate planning purposes. By age 78, the ILIT’s Trustee sought alternatives, feeling the return on investment had become unsatisfactory when compared to other financial vehicles.

We facilitated a tax-free 1035 exchange of the existing policy, transferring the cash value into a new proprietary policy with no surrender charges. This new policy was designed to have premiums paid through a premium financing structure, where a lender would cover the premium payments, and the ILIT would only pay the annual interest on the loan. The proprietary product offered higher cash values throughout the policy's life compared to retail products, eliminating the need for secondary collateral in the first five years.

The Trustee, experienced in borrowing for real estate, understood that refinancing might be necessary and was comfortable with this approach. He recognized that future collateral requirements would depend on the lender’s terms and the policy's annual performance.

At age 87 (policy year 9), the high-interest rate environment and the lender’s collateral requirements led the Trustee to consider a life settlement as an exit strategy. Surrendering the policy outright would have yielded approximately $1.2M in surrender value, but with a loan balance of over $1.8M, the ILIT would need to pay $600,000+ to clear the loan. With an estimated life expectancy of 63 months, the ILIT received approximately $2.3M in the life settlement market. After settling the loan, the ILIT netted $511,410 in exchange for the policy’s eventual death benefit, allowing the Trustee to sell the policy, pay off the loan, end interest payments, release the collateral, and generate a substantial profit for the ILIT (even when considering the annual loan interest payments).  

We welcome any questions or opportunities to assist you or your clients in achieving identified goals. We take pride in serving a select number of families, businesses, and charitable institutions each year, and we look forward to hearing from you.