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Funding the Future with Leveraged Premium - Business Planning Group

Understanding Wealth® Blog

Funding the Future with Leveraged Premium

Leveraged premium plans enable clients to leverage liquid assets to fund a life insurance policy. With a leveraged premium financing arrangement, the insured (or the insured’s trust or corporation) takes out a loan from a lender to pay the premiums on a life insurance policy. Here are a few benefits of leveraged premium plans:

  • Funds are loaned, not earned. Leveraged plans reduce liquidity needs. This is helpful if your assets are not readily convertible to cash or are committed to other investments or expenses.
  • You have an insurance need but current assets are employed in investments with returns that are higher than the cost of borrowing.

Leveraged premium plans have many uses, including:

  • Retirement income planning
  • Prefunding of a corporate buyout
  • Estate maximization
  • Estate Tax Replacement
  • Legacy Planning
  • Corporate liquidation value replacement
  • Estate liquidity
  • Corporate benefit planning

Here’s how leverage premium plans work:

Tax Considerations

  • Interest on a loan to acquire life insurance is generally
    considered personal interest and not tax deductible.
  • Since loans to a trust for premium payments are not taxable gifts, gift taxes can be minimized.
  • Estate maximization
  • Providing a personal guarantee or collateral on a loan does not cause an incident of ownership in the policy.
  • If a policy can be structured inside of an irrevocable life insurance trust (ILIT), the policy and proceeds can be excluded from your estate value.
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