Premium Financing
Insurance Financing
Banks, trust companies and private lenders commonly treat permanent life insurance (predominantly whole life) as a collateral asset, often credited at 100% of its cash surrender or policy value. An Insurance Funding Arrangement (IFA) is the structured process used to fund such life insurance policies using tailored financial mechanisms.
Objectives and suitability assessment
Policy selection and design
Funding mechanism options
Use of trusts and ownership structures
Lender and collateral arrangements
Due diligence and underwriting
Documentation and closing
Post-issuance administration
Tax, regulatory and compliance considerations
Exit strategies
Key considerations and best practices
Use whole life or other products with demonstrable, stable cash value when lender collateralization is required.
3. Funding Arrangement
The IFA process involves designing a funding arrangement to pay for the life insurance policy premiums. This may include various funding mechanisms such as:
Out-of-pocket premium payments: The policyholder pays the premiums directly from their revenue, income, or savings.
Premium financing: Borrowing funds to pay the insurance premiums, often with the policy or other assets serving as collateral.
Split-dollar arrangements: Sharing the cost of premiums between the policyholder and another party, such as an employer or a family member.
Irrevocable Life Insurance Trust (ILIT): Establishing a trust to own the life insurance policy and to pay the premiums on behalf of the insured. By following the IFA process for funding life insurance policies, individuals or companies can more reliably ensure that their insurance needs are met effectively and that the chosen funding arrangement aligns with their broader financial objectives and specific circumstances.
Assessment and Planning
The process begins with a careful assessment of the individual’s financial goals, insurance needs, and overall financial situation to establish priorities and tailor appropriate recommendations.
2. Selection of insurance policy
Based on the client’s needs and long-term goals, an appropriate life insurance policy is carefully selected. This may include term life insurance, whole life insurance, universal life insurance, or other suitable types of policies tailored to the client’s financial situation.
Considerations:
IFAs can expense the interest cost. PF cannot. Please consult our team of professional advisors, accountants and lawyers regarding expense deductibility.
Credit Underwriting Considerations:
Credit Bureau Reporting Entities: These include banks, trust companies and credit unions. These are governed by the banking act. Some may say they do not report to the credit bureau; but, that is not guaranteed.
Capital Market Lenders: These are non-reporting entities and will not report to the credit bureau.