Question: I do not have a lot of cash for a life insurance policy. Is there a way for me to finance the purchase? Answer: Over the last ten years or so, insurance agents have looked for ways to borrow money to purchase life insurance. The needs have historically been for clients who desire insurance for liquidity and the payment of estate taxes but could not come up with the cash for the payment of the premium. Under a so-called ‘premium financing’ arrangement, a client borrows money and uses the borrowed funds to buy life insurance. The concept is that when the client becomes more ‘liquid’ (perhaps through a sale of a business), the loan would be repaid and the client could take over the premium payments, if there are any premiums that remain to be paid. From the standpoint of financing the payments, this concept has particular benefits. If there is a real insurance need, premium financing can allow a client to cover a period where they do not have the ability to make payments due to a liquidity crisis. For the right circumstances, premium financing could offer a solution to the client’s insurance need. Comment: You should be aware of something out there described as “Stranger Owned Life Insurance” of STOLI. Here, a client pledges his life expectancy to others in exchange for a cash payment now. The life insurance is generally purchased with borrowed funds and the loan is repaid by selling the insurance in a life settlement and then paying off the loan with the proceeds. STOLI is certainly a concept that you should approach with caution… If you have any questions or would like more information please contact Steve Shane at: firstname.lastname@example.org | 301.575.0313.
Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.