Life insurance premium financing

Adding a borrowing strategy to your estate plans can protect your heirs in the future—and your financial position today. For the executors of your estate, paying death taxes may precipitate a liquidity crisis—forcing them to hastily sell assets that would otherwise be inherited by your beneficiaries, or resulting in other undesired outcomes.

A way to plan for estate taxes

One way to protect future heirs is to insure your life so that, at your passing, estate taxes can be paid with the proceeds from a high-value life insurance policy. Typically, in such arrangements, the policy is held separate from the rest of the estate, in a trust.1

An insurance policy can directly benefit your heirs and other beneficiaries. The proceeds of the policy can be used to:

  • Cover estate taxes and thereby avoid liquidating assets or disrupting an investment portfolio
  • Retain control of significant or illiquid assets, such as a concentrated stock position
  • Provide funds to sustain a business

Many of our clients consider financing their life insurance premiums in order to reduce the gift tax implications of contributing assets to a trust.

Why borrow?

Not surprisingly, putting such protection in place comes at a significant cost, in the form of annual policy premiums. As a result, many clients elect to finance those costs with a loan collateralized by the cash surrender value of the policy, in addition to marketable securities.

This approach has the added benefit of being tax efficient: the funds that the trust borrows to pay the annual premiums and interest expenses generally are available free of gift taxes.

Financing the cost of a high-value insurance policy can benefit you and ultimately your estate in many ways, now and in the future, by allowing you to:

  • Maximize insurance coverage without adversely affecting your current cash flow (or lifestyle)
  • Avoid having to sell assets—and potentially triggering a taxable event—to cover the cost of the premiums
  • Allow investments within the policy to grow free of income taxes
  • Gain access to liquidity at an interest rate that is often less expensive than a “policy loan”

A “carry” opportunity may exist as well: If the interest rate charged on the loan is lower than the rate of return earned on the cash value of the policy, there may be potential appreciation.

What to consider

There are risks inherent in any borrowing strategy. These include interest rate

fluctuation, market volatility and the possibility of collateral shortfall, which may lead to a margin call. Before deciding whether to finance the acquisition of high-value life insurance by borrowing, we encourage you to discuss your objectives with your J.P. Morgan team as well as with your legal and tax advisors.

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