This short blog will discuss the concept and the benefits of Premium Financing in Life Insurance
What is Premium Financing?
Premium financing is the concept of borrowing money from a bank to pay for life insurance
premiums. This solution can be extremely powerful for individuals who face an Estate Tax issue, and for individuals who would rather use their liquid funds in other business/personal ventures. In short, premium financing can allow you to acquire all the life insurance you need, without limiting your ability to achieve your personal and business goals.
Why Premium Financing?
The Federal Estate Tax is a tax levied on individuals worth over ~$12M, or married couples’
worth over ~$24M. As the Tax Cuts and Jobs Act sunsets heading into 2026, this number will decrease to ~$6M for individuals, and ~$12M for couple. In essence, a net worth over these amounts will result in a Federal Estate Tax that progressively increases to 40% already after the $1 million of net worth above the ~$6M or ~$12M exemption.
For Example
John is single and is worth $30M. He owns a farm that he intends to pass on to his son. If he
passes away in 2030 after the TCJA sunsets, he will have approximately a $6M exemption. That means that the remaining $24M is subject to the Federal Estate Tax. With the Federal Estate Tax being 40% already after the first million above $6M, John would be looking at a Federal Estate Tax in the region of a whopping $9-10M. Unless John or his son has around $10M in liquid funds, then John puts his beloved farm in serious jeopardy as his son would likely need to sell the farm to come up with the proceeds.
In this scenario, to cover the Federal Estate Tax, John could acquire $10M of life insurance to ensure that the farm is passed on seamlessly to his son. Acquiring $10M of life insurance is not free, and perhaps John wants to use his liquid funds towards his farm, other investments, or other business interests. By borrowing money from the bank, John can use the bank’s money to pay the life insurance premiums, while maintaining his liquid funds towards his other personal and business interests.
Summary
If you are a High-Net-Worth individual, planning for the Federal Estate Tax is critical. Premium financing is a splendid tool for solving the problem. There is no one size fits all when it comes to premium financing. Various factors come into play, such as age, health, net worth, and more. With years and years of experience in this field, SKA Financial Group can walk you through the intricacies of premium financing and help put together a plan for you that you feel 100% certain about.
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