Indexed universal life insurance is, without debate, the best choice for life insurance premium financing.
On the other hand, an indexed universal life policy has four strong reasons that make it the top pick for premium financing.
If you landed here, going to the main Premium Financing for Life Insurance article will give you the rest of the information you need about premium financing.
If you are unfamiliar with the type of life insurance, here’s a brief overview.
First, there are two types of life insurance.
- Term Life Insurance
- Permanent Life Insurance
Quick Overview of Term Insurance
Term life insurance tends to cost less. The drawbacks to the attractive pricing are the limitations of the product. It only provides death benefits for a specified period. These periods can be anywhere from a year to 30 years.
When a term policy expires after the set time, it becomes much more expensive.
Some term policies will let you convert them into permanent policies, but that can also dramatically increase your premiums. If your health deteriorated during the life insurance term, your insurance company might not renew your policy.
There are limited tax advantages with term insurance. Overall, term tends not to be the best choice for high net worth individuals.
Quick Overview of Permanent Life Insurance
On the opposite side of the coin from term insurance, permanent policies cover you for life. Instead of being limited to death benefits only, they have a cash value accumulation.
This cash value accumulation portion grows on a tax-deferred basis. The best strategy when using premium financing is to build up the cash value accumulation quickly, ideally within the first ten years.
This allows your irrevocable life insurance trust (ILIT) to use this non-taxable equity to pay off the third party loan. Once the loan is paid off, then the ILIT attains full ownership of the policy.
Finding Low-Cost Permanent Life Insurance Policies that Work with Premium Financing
Not all life insurance policies are equal when it comes to finding the right one for premium financing. Not every life insurance company offers every product. Plus, the terms and conditions for each type of permanent life insurance vary between companies.
The best way to make sure you get the best policy for your situation is to speak with an independent life insurance agent. Independent agents work with a variety of companies to find the one that best fits you.
The other type of life insurance agent is a captive agent. They are contractually bound only to sell one company’s products. While that can give you a variety of products, that means you are stuck with the underwriting guidelines that company has.
Underwriting guidelines dictate the health class which determines how much to charge someone for life insurance. If you have a medical condition or hobby that the insurance company doesn’t like, you won’t know that you might get lower rates from a different company.
There are upwards of 16 possible health classes. Each one represents a 25% difference in what you pay for premiums. When you are considering a policy worth millions of dollars, having a professional shop the market for you can end up saving you hundreds of thousands.
An independent agency specializing in premium financing for life insurance like Abrams Insurance Solutions can direct you toward the best insurance company to handle this part of your estate planning as well as illustrating the estate and gift tax benefits of premium financing. Give us a call today at 858-703-6178 to see which companies might work best for your estate.
Types of Permanent Life Insurance Policies for Premium Financing
Permanent life insurance policies break down into different types. Your options for premium financing are the following:
- Whole Life
- Universal Life
- Guaranteed Universal Life
- Indexed Universal Life
Drawbacks of a Whole Life Policy for Premium Financing
Whole life policies are rigid. You have no options with the death benefit. Neither do you have any flexibility with the policy premiums.
The investment part of the cash value accumulation on the policy does not provide any choices either. You are restricted to the dividends you receive, if any. Any potential dividends resulting from the investments are made solely by the life insurance company.
This type of policy comes with a guarantee on the cash value accumulation. However, there can be a worrisome difference between the interest rate on the premium financing loan and the overall growth of the cash value portion.
Most insurance companies use their portfolio rate to determine dividends payable on the individual policy. This creates a gap between the cash value growth and the lender’s interest rate.
Returns on a whole life policy tend to run between 4% and 6%. This is much lower than standard returns on an IUL policy.
This conservative ROI for whole life policies ends up reducing both your cash flow and the available tax advantages for premium financing. The lower ROI means the bank may require you to provide additional collateral as well as provide some of the payment yourself.
Drawbacks of a Universal Life Policy for Premium Financing
Despite their names, universal life, indexed universal life, and guaranteed universal life policies are all remarkably different.
A universal life policy offers you more flexibility than a whole life policy. With a universal policy, you get extra flexibility in death benefits, premium payments, and the cash value accumulation portion.
You can choose between fixed death benefits or an increasing death benefit equal to the face amount of the policy. If for some reason you need to reduce or stop premium payments, you can instead use the cash value portion to pay for the premiums.
This is a useful tool for an individual policy. However, for premium financing, adjusting your premiums does not fit with the goal. Your ILIT trustee uses the cash value to pay for the loan - not the premium itself.
Many companies also include surrender charges when it comes to borrowing from the cash value portion of a universal policy.
Universal policies base their cash value accumulation on monthly interest rates. This can cause wide variances when compared with a whole life policy.
Poor performance can cause the third party lender to make loan adjustments. Any adjustments can (and will likely) impact both your liquid assets and the loan collateral requirements.
Drawbacks of a Guaranteed Universal Life Policy for Premium Financing
Guaranteed universal life policies are designed mainly for the death benefits. In many respects, it acts similar to a term policy but provides coverage for life.
The cash value accumulation portion of these policies can range from low to non-existent. That means you would have to provide more collateral for the premium financing loan. In many cases, the lender requires collateral nearly equivalent to the full amount of the loan.
The 4 Reasons an Indexed Universal Life Policy Works Best for Premium Financing
The following four reasons make an indexed universal life (IUL) policy, the best choice for premium financing for life insurance.
Number 1: Choices of Cash Accumulation Accounts
With an IUL policy, you have two choices for the cash value accumulation portion, a fixed account or an indexed account. Both are good choices, but your risk aversion and available assets to use as collateral will determine which is best in your case.
Fixed IUL Accounts
A fixed account is safer someone who is fiscally conservative. It works like a universal life policy. The company credits the interest rate to the policy after the company’s stated current rate. The current rate is, in turn, tied to the yield on the general account portfolio.
The rate of returns on fixed accounts is much more conservative. Your premium financing lender will require you to provide a higher amount of liquid collateral on the loan.
You would also either need to have greater liquidity to pay for the loan or incur a more extended loan period.
Indexed IUL Accounts
The performance on a market index (such as the S&P 500) or a combination of indices determine the rate of return on an indexed IUL account. The life insurance company does not explicitly invest in these indices. Instead, it uses other option contracts with a portion of the premium.
There are two types of crediting methods.
- Annual point-to-point strategy
- Monthly point-to-point strategy
The life insurance company then credits interest to the account based on the average performance of an index or weighted blend of indices.
Lenders prefer this type of IUL account because the overall performance is generally higher than a fixed account.
Number 2: Compound Interest
Your indexed IUL account accumulates compound interest, quickly building the cash value of the IUL cash accumulation portion.
This interest also accumulates on a tax-deferred basis.
Number 3: Guaranteed Rate of Return and Zero Loss
Most IUL policies offer a guaranteed minimum rate of return. For a fixed account, the guaranteed rate of return is around 3%. This will vary between companies, but most stay pretty close to this number.
The guaranteed rate of return for an indexed account ranges from 0% to 1%. In either case, your cash value accumulation portion will not lose any money. It doesn’t matter how poorly the market performs.
During economic downturns, this guarantee locks in and protects your gains.
Number 4: Good Return Rates When the Market Performs Well
Indexed IUL policies do cap the rate of return you can earn during a banner year. However, these caps are high, especially compared to other permanent life insurance options. Most insurance companies cap the rate of return between 12% and 13%.
The Bottom Line
An IUL policy offers the most flexibility for premium financing. Lenders also prefer this type of policy because the cash value accumulation portion grows faster and presents less risk than a variable policy.
Quickly growing your cash value accumulation is the best strategy for premium financing. Most premium financing experts suggest a 10-year exit strategy. An IUL allows you to achieve this goal.
Contact Abrams Insurance Solutions for Information on Premium Financing
Our premium financing experts at Abrams Insurance Solutions have access to over 70 the top-rated life insurance companies in the United States. Many of these companies specifically create IUL policies to combine with premium financing.
Our goal is to find you the companies with the best underwriting criteria for your needs. That way you can save tens of thousands of dollars on your premiums.
We are proud to partner with a premium financing consulting group with 27 years of experience in premium financing. With access to over 26 premium financing lenders, there is a perfect combination for every estate.
Call us today to discuss your estate needs at 858-703-6178. Our premium financing experts are happy to answer any questions.