Premium finance is a strategy used by wealthy individuals and business owners to finance premiums for large life insurance policies. The strategy allows a high net-worth individual who has a need for permanent life insurance to use an alternative method for paying the premiums. Rather than using their current cash flow or assets to pay for those premiums, they may choose to finance them from a bank. Individuals who are well suited to the strategy understand both the power, and associated risks, of leverage.
Premium financing can be an attractive option to anyone who:
Needs a substantial amount of insurance for estate-planning, wealth accumulation, liquidity at death, asset protection or business purposes
Doesn’t want to use their existing capital to pay the premiums
Is insurable at standard rates or better
Satisfies the carrier’s underwriting regulations
APIM is uniquely positioned as an experienced brokerage working with only the most trusted carriers and lenders in the market. These powerful relationships mean that we can find the best solutions for your clients needs. Additionally, our point of sale experts are here with capital and sales support to make the process as smooth as possible for you and your client.
Useful applications for Premium Financing include:
Your clients want to make sure the assets they’ve worked so hard to accumulate during their lifetime go to the people or organizations they care about. Estate planning can be a complex process, but you can make it easier.
Estate planning can help achieve a variety of goals and objectives, including:
Providing support and financial stability
Preserving assets for future generations
Supporting a favorite charity or other worthy cause
Ensuring assets, including those that pass by beneficiary designation (e.g., retirement accounts and life insurance policies), will be distributed according to wishes
Minimizing taxes and expenses
Ensuring that individuals your client chooses can make decisions on their behalf in the event of incapacity
With APIM, estate planning is made simple with access to experts and top life insurance carriers to assist with evaluating the estate planning needs of your client.
Client presentations are a key component when dealing with advanced concepts like Estate Tax Planning. There are several ways to fund an estate plan and they can be complicated in nature. APIM will provide you with the life insurance training, tools and presentation materials to ensure your clients are fully educated on the estate tax planning concept that’s right for them. Get started with this Estate Tax Calculator.
A defined benefit plan is a retirement plan in which employers provide guaranteed retirement benefits to employees based on a set formula. In a defined benefit plan, a company takes charge of its workers’ retirement income. Using a formula based on each worker’s salary, age and time with the company, an employer will pay into and manage a retirement plan. In retirement, the workers draw a dependable check from the company plan, regardless of how the market performs. That’s what makes the benefits defined. The company bears the risk of stock market fluctuations, meaning that the worker doesn’t have to worry that a downturn will make retirement unaffordable.
Cash Balance Pension Plans
A cash balance pension plan is a pension plan with the option of a lifetime annuity. For a cash balance plan, the employer credits a participant’s account with a set percentage of their yearly compensation plus interest charges.
A cash balance pension plan is one in which participants receive a set percentage of their yearly compensation plus interest charges.
The benefit of such plans is that contribution limits increase with age.
People 60 years and older can save well over $200,000 annually in pretax contributions compared to a 401(k) where total employer and employee contributions for those 50 and older are limited to $63,500 in 2020.
Benefit Focused Plan
Benefit-Focused Defined Benefit (BFDB) pension plans were developed by some of the country’s leading accountants, tax lawyers and actuaries as a response to the statutory dollar limit and excise tax. They were further refined and solidified as a result of the 2006 Pension Protection Act. With the BFDB design, the dollar limit is based on a joint life income annuity actuarial calculation at age 65 and does not permit a lump-sum payout. Contributions are based on the amount it would take to provide a joint lifetime monthly retirement income.
Ideal Candidate Profile:
Business owner is earning a high income and is exposed to combined Federal and state income taxes that can exceed 50% in some states, including California;
Business owner wants to reduce his/her Federal and state income tax bill; and,
Business owner wants to maximize tax-deductible contributions to a plan that provides retirement and estate planning benefits to him/her and the owner’s family
Tax-Free Growth: Life insurance tax codes allow your clients to grow money inside their policy completely tax-deferred when structured correctly. If the policy is designed using the correct internal revenue codes, they can contribute as much money as they wish with absolutely no contribution limits.
Tax-Free Distribution: The loans from the IUL policy’s cash value is classified as income-tax-free. Imagine your client attending their child’s graduation knowing that their tuition has been fully paid for without the burden of student loans.
Principal Protection: With an IUL policy, your client can participate in gains when the market goes up, to a limit, with no risk of market volatility. When the market goes down, your clients are protected against often devastating losses.
Executive bonus plans, commonly referred to as 162 bonus plans, can offer a simple and flexible option for providing benefits to attract or retain key employees through the purchase of life insurance. The insurance-funded bonus plan allows the employee to set aside additional funds that could be accessed if needed for retirement or other purposes, provide death benefit protection to family members, and establish estate liquidity.
A 162 bonus plan is an arrangement where the employer effectively funds an employee’s purchase of life insurance through the payment of bonuses to the employee or possibly through direct payment to the issuing carrier. The employee (or the employee’s irrevocable life insurance trust “ILIT”) acquires and owns all rights in the policy. The employer in a 162 bonus plan does not anticipate reimbursement of any premiums paid, is not a direct or indirect beneficiary of the policy, and never owns an interest in the policy.
Common scenarios for the use of 162 bonus plans including the following:
For employers looking to attract and retain key employees
As key employee carve-outs from group-term life insurance programs
For companies looking for alternatives to qualified plan benefits, such as in a small business setting where qualified plans may be too expensive
For closely-held businesses with non-owner key employees, where the plan can provide employee benefits without impacting ownership or control of the company
At APIM, we have specialists available to help design the ideal solution for your clients.