Premium finance is possibly one one of the most potent wealth building strategies ever created. It enables affluent individuals to obtain a huge cash value life insurance policy without tying up large amounts of personal capital. It’s like max funding a Roth IRA with tons of money, but someone else is funding it for you. In premium finance, instead of paying life insurance premiums out of pocket, individuals or businesses use a loan to fund the policy. This strategy provides an incredible opportunity to gain a “double tax benefit,” making it particularly appealing for business owners or high-net-worth individuals. Not only can you get an immediate tax benefit, large contributions can be made to the policy, making for a sizable tax free asset.

Here’s how it works: the interest on the loan used to pay the life insurance premiums is often tax-deductible as a business expense. At the same time, the life insurance policy grows tax-deferred, and the cash value can eventually be accessed tax-free during retirement. The combination of these tax advantages makes premium financing a highly efficient wealth-building tool.

How Premium Financing Works

1. Meet with a financial professional specializing in the design and implementation of cash value life insurance for wealth building.
2. Complete two applications; one for a life insurance policy and one for a loan.
3. A financial institution provides a loan to cover the annual premiums of a permanent life insurance policy.
4. The policyholder provides collateral to secure the loan, which can include the policy’s cash value or other assets.
5. Each year, the policy owner pays the interest on the loan.
6. The policy grows over time, with tax-deferred accumulation in the cash value.
7. The loan is repaid either from the policy’s cash value, the death benefit, or other personal or business assets.
8. The owner of the policy is left with a tax free asset, financed by a bank, in which he or she only paid a small portion of the payments and received a tax benefit for the amount paid.

Double Tax Benefit for Business Owners

For business owners, premium financing offers a unique tax advantage that makes it even more attractive. By structuring the loan as a business expense, the interest on the premium financing loan can often be written off as a tax-deductible expense.

Here’s an example to illustrate:

Example: Business Owner Leveraging Premium Financing
James owns a successful company and has a high net worth, but his liquidity is tied up in the business. He wants to secure a $5 million life insurance policy for estate planning and future retirement income. Instead of paying the $150,000 annual premium out of pocket, James uses premium financing. The interest on the loan, approximately $25,000 per year, is tax-deductible as a business expense.

Over the next 20 years, the policy’s cash value grows tax-deferred, and James uses it to pay off the loan. At retirement, he begins taking tax-free loans from the remaining cash value, creating a steady income stream. James effectively secured his retirement income at a fraction of the cost, while also reducing his current taxable income through the interest deduction.

Why This Strategy Stands Out:

• Reduced Upfront Cost: James funds his retirement with minimal out-of-pocket expenses, preserving his liquidity for business operations.
• Tax Advantages: The combination of tax-deductible loan interest and tax-free retirement income creates an efficient wealth-building mechanism. If used for estate planning, the death benefit can be tax free.
• High Leverage: James leverages other people’s money to secure a high-value policy that grows over time.

Considerations and Risks

Premium financing can be an amazing strategy, but it’s not without risks. It involves several moving parts that require careful monitoring and planning:

• Fluctuating Interest Rates: If interest rates rise, the cost of the loan increases, potentially making the strategy less favorable.
• Collateral Requirements: Policyholders must maintain sufficient collateral to secure the loan. A decline in the value of the pledged collateral, including the policy’s cash value, could result in additional out-of-pocket costs.
• Eligibility Criteria: This strategy is best suited for wealthy individuals who meet the net worth or income requirements set by lenders, typically those with a net worth over $1 million or an annual income of $200,000 or more.

Who Should Consider Premium Financing?

Premium financing is ideal for individuals or business owners who:

• Want a large life insurance policy but prefer to preserve liquidity.
• Have substantial assets or income to qualify for the loan and provide collateral.
• Are looking for a tax-efficient way to secure retirement income or pass wealth to heirs.

A Rare Opportunity for High Net Worth Individuals

Where else can someone almost completely fund their retirement at a fraction of the cost while simultaneously reducing current taxes? Premium finance offers a rare opportunity to leverage other people’s money to build wealth, secure retirement income, and preserve liquidity. It’s an advanced strategy of utilizing good debt with significant potential for those who meet the requirements and understand the risks.