• Premium financing structures provide a means for individuals and businesses to obtain large amounts of whole life insurance with reduced annual outlays. These structures are viable for situations where constraints due to cash flow availability or gift tax concerns may complicate traditional planning methods. Premium financing can provide a sophisticated solution as an alternative to paying large premiums out-of-pocket for estate and business insurance needs.

• Premium financing structures combine a permanent life insurance policy and a loan facility, both tuned to reach a desired outcome. Generally, the insurance policies are structured using Ten Pay premium payment options and the loan facility is drawn to fund large portions of the annual premiums and, as an option in certain structures, a portion of accrued interest. The remainder Partial Payment of annual premiums (and in certain cases accrued interest) is made by the policy owner in an amount targeted as a multiple of the annual gift tax exclusion. The facility is generally secured by a combination of the cash value of the insurance policy and posted collateral such as cash, stock and bond portfolios or, at times, a letter of credit for shortfalls that occur in the earlier years.

• The insurance policy and financing facility are set up and optimized to provide the desired death benefit on a net basis (after paying off the facility amount) for the beneficiaries, while providing increasing cash value to secure the financing over the policy duration. While premium-financed insurance structures can provide viable solutions for many cases, parties must understand the underlying risks as well as the structural tools available for mitigation.
  

• Premium financing is designed for high net worth individuals with assets (excluding principal residences) in excess of $5,000,000 with needs for large amounts of permanent insurance. Small corporate entities also employ the structure for buy-sell situations and key person insurance.

• Premium financing provides a cost-effective alternative to usage of post-tax dollars for premiums, rather than liquidation of existing investments which can change portfolio composition and trigger taxable income. This can benefit wealthy individuals with illiquid investments, such as real estate or a closely held businesses, who may be not be willing to incur liquidation costs (such as taxes), or sell into adverse markets.

• Premium financing potentially reduces annual outlays for life insurance (sometimes, 30% or less of the annual premium required for conventional permanent insurance); however, it is important to remember that premium financing is not a means to obtaining free or reduced cost life insurance.

• Typically, the Trust assets (the policy and other assets) are structured to be excludible from the insured's taxable estate.

• Premium financing provides a means to reduce gift tax liabilities and to conform with annual and lifetime exemptions.

• While these benefits can be attractive, potential insureds should work closely with estate planners and accountants to ensure the structure meets their specific needs

The Interest Rate - Interest rates for premium financing loan facilities are usually based on PRIME or a LIBOR rate, plus a spread determined by the lender.

Maturity – Maturities for loan facilities vary from one year to ten years, depending on the lender and other terms

Additional Collateral Requirements - Policy cash values serve as the primary source of collateral for the loan. Collateral shortfalls, in the early years, are typically covered by additional collateral pledged by the policy owner or a Grantor.