Preserve Your Legacy By
Financing Life Insurance Premiums
By borrowing money to pay for the premiums, you may be able to maximize the benefit of the life insurance policy while minimizing your exposure to taxes and leaving your current investment strategy intact.
If you anticipate a need for liquidity upon your death, whether to cover the taxes due on your estate or to facilitate a smooth transfer of your business, a life insurance policy with a substantial death benefit could be a wise addition to your wealth and estate plan. Unfortunately, the premiums associated with such a plan can be significant. You may need to liquidate investments to cover the cost, potentially exposing yourself to gift or capital gains taxes and reducing your ability to take advantage of growth in your portfolio.
There is, however, another way. By borrowing money to pay for the premiums, you may be able to maximize the benefit of the life insurance policy while minimizing your exposure to taxes and leaving your current investment strategy intact.
Is Premium Financing Right For You?
Generally speaking, premium financing is a suitable strategy for those with a net worth of $25 million or greater who wish to use insurance to provide the liquidity necessary to pay estate taxes and ensure that they are able to pass their legacy assets on to their heirs. This strategy serves those individuals who do not want to sell off investments or allocate current income to addressing that need. Whether or not it makes sense in a particular case depends on a number of factors: how much insurance is needed, what the associated costs are and, whether or not there may be alternative estate planning techniques that satisfy the need.
If you are considering this strategy, begin by working closely with your attorney to devise an estate plan. If you decide you need insurance, reach out to a life insurance professional. Trying to determine the appropriate policy can be a complex and challenging undertaking, and a life insurance professional can help you select the policy type and amount that's appropriate for your situation. Your advisors can also help you determine the ownership of the insurance policy. It's important to explore all your payment options, based on your individual situation and financial needs. While premium financing may be the right strategy for you, you should first consider if you would be better served by paying the insurance premiums outright.
How Premium Financing Works
Those who are confident that premium financing is right for them typically set up an irrevocable life insurance trust (ILIT).
This trust is designed to own the life insurance policy, which means the policy is owned outside of your taxable estate. The beneficiaries receive the death benefit free of estate and income taxes. The ILIT would then take out a loan in order to pay the premiums. Typically, the policy is used as collateral. In the early years, the cash value of the policy will not be sufficient collateral for the loan — you may need to use a portion of your investment portfolio to make up the difference.
By funding the ILIT with a loan rather than direct contributions, you can limit your exposure to gift taxes and avoid exhausting your lifetime gift tax exclusion. Annual contributions to the ILIT may be needed to cover interest payments on the loan, but are typically less than the premium and may be within your annual gift tax exclusion limit.
What is Kai-Zen?
Kai-Zen is a strategy that helps you maintain your current lifestyle in the event of a chronic illness, premature death, or an inability to sufficiently save for retirement. Protecting your earnings is critical to insuring your ability to save for retirement. Due to limitations, traditional retirement plans are typically insufficient for high-income earners. If you want to maintain your lifestyle in retirement, you need a proactive strategy that puts more money toward protecting your future income without putting a drain on your current finances.
Kai-Zen is the ONLY strategy that uses leverage to help you acquire more of the benefits you need to financially protect you and your family. Its unique fusion of financing and life insurance offers you more protections and the potential to earn more for retirement than you could obtain without leverage.
How it Works
The Kai-Zen strategy is simple. Premiums are jointly funded by bank financing and the participant or employer. The bank financing provides the majority of the total contribution to the plan, and the life insurance policy itself is the full security for the loan. This strategy is specifically designed so that the participant is not required to go through financial underwriting or sign any loan documents. As an additional protection, Kai-Zen’s structure is also set up to protect your benefits in the event of employer bankruptcy.
By using bank financing, the Kai-Zen strategy allows you to realize benefits beyond your expectations while keeping contributions within your means.
What is Tri-Zen?
Tri-Zen is a pre-tax benefit strategy supplemented 3x by financing where the strategy is sole security for the loan. It is suitable for C Corporations and not-for-profit organizations. Consequently, it allows employers to offer the ideal benefits for their key personnel and highly compensated employees without increasing costs.
The optimal benefit strategy would incorporate the following features:
Pre-Tax Contributions
Tax-Deferred Growth
The Ability to Access Cash Value Tax-Free
3X the Leverage
Accordingly, Tri-Zen is an incentive strategy that offers all these benefits in one of the most tax-advantaged manners available today. It is suitable for C-Corporations and not-for-profit organizations. Traditional benefits are a huge expense to most employers, and Tri-Zen allows employers to offer the ideal benefit plan to their key personnel without increasing costs. In fact, with Tri-Zen all the funds spent are an asset to the company. With most of the money required to finance the strategy coming from a lender, Tri-Zen brings substantial new money to the table with 3:1 leverage. As a result, this affords more benefits at a lower cost.