Financial Planning in Insurance is an essential part of estate planning. It protects your family and your legacy in the case of death, and it can be particularly important for people of wealth or those with complex financial assets.
There are different ways to pay for life insurance, particularly if you don’t want hefty premium payments having too much impact on your current cash flow.
In our ongoing efforts to identify new investment strategies for our clients, two of the leaders at our firm, Nathan Faldmo, CFP and Nikki Polistina, CFP have been looking at ways to finance life insurance for some of our high net worth clients.
Many of our clients were intrigued with the opportunities but wanted an overview of two of the most popular options. Below is a snapshot of both.
Premium Financed vs. Premium Funded
Premium financed has long been a way to finance insurance, but in the last decade, there has been a new vehicle which some call premium funded. Smart financial planning in insurance means knowing the difference between investment options and what will help you and your financial counselor select the best option for your unique situation.
Premium Financed Keeps Assets in Place
With premium financed life insurance, your premiums are financed through a bank. As the borrower, you are then responsible for paying back the bank with interest. Although the monies inside the insurance policy grow tax-free, and that growth can cover some of the costs of financing costs (including interest accrued).
Premium financing options are customizable and structured accordingly. The interest can be wrapped up in the loan, or you could pay interest annually.
The policy itself can be used as collateral, or you can use other assets as collateral. This option likely requires a lower collateral amount since the loan with the bank renews annually.
It’s also not uncommon for premium financing structures to be adjusted over time, especially as interest rates and circumstances change.
If you need a substantial amount of life insurance coverage and you don’t want to liquidate assets to pay for life insurance, premium financing could be a good option.
You aren’t faced with capital gains taxes by liquidating assets to pay for premiums up front. And your money does not sit in a CD – you can keep it invested. However, you must be approved every year and difficulties can arise when renewing.
Premium Funded Frees Up Cash Flow
Similar to premium financing, collateral is used, however it is used to create a bond instead of relying on a loan from the bank. Premium funding would typically be for individuals that can have more money as collateral.
Premium funded is also a form of financing, however the client does not need to pay any money out of pocket.
Using premium funding to pay life insurance premiums allows for more financial flexibility since the proceeds from the bond can be used for more than just paying life insurance premiums. The bond is backed by one of the large banks, so the client is not liable to the bondholder.
Rates for premium funding are competitive – lower than other forms of financing. While it is a form of debt, it is free from personal guarantees or charges over assets or a business. It should not affect other loan or financing covenants.
With premium funded life insurance, you do not have to be approved every year, unlike with premium financed, so the overall experience is simpler.
Custom Financial Planning in Insurance
With both premium funded and premium financed life insurance, you are open to more possibilities. You can potentially secure the life insurance coverage you need specific to your situation.
Both options would also be good for businesses and business owners, as they smooth out the cost of insurance over a longer period of time and free up cash flow for regular and unforeseen expenses.
As with all financial products, it comes down to the terms and the details.
At Stableford Capital, we have a fiduciary responsibility to do the research and work, then start the dialogue with clients to discuss both possibilities. Premium funding and premium financed life insurance are usable under different circumstances, so it’s important to look at both and select which is best for each individual client.
Our integrated advisory services encourage clients to look at all aspects of their present finances to make the best choices for their financial future.
To learn more about financial planning in insurance and which life insurance option may be right for you, contact a Stableford financial counselor today by calling 480.493.2300 or contact us online.