Insurance-based financing, in plain language
Permanent life insurance can play a useful role in estate planning, business succession and buy-sell agreements. The challenge is paying for it. Premiums on a large permanent policy are significant, and paying them from cash means that money is no longer working in your practice, business or portfolio.
What it is
Insurance-based financing uses a credit facility to pay the premiums. The policy, and in particular its cash value, is assigned to the lender as collateral. Where the policy alone does not cover the facility, other security may be added.
Who it can suit
It tends to suit people with a genuine long-term need for permanent coverage, steady income or a clear future liquidity event, and capital that has a productive use elsewhere. It is not suitable for everyone, and it is never a reason on its own to buy insurance.
What to ask before you sign
How will the facility be repaid, and when? What happens if interest rates rise, or if the policy's value grows more slowly than illustrated? What additional collateral might be required, and in what circumstances? How has your accountant reviewed the tax treatment for your situation?
A good structure has clear answers to all of these before anything is signed. Ours start with the exit.
General information only. Not tax, legal, insurance or investment advice.