by David Drake
Many people in the world recognize the importance of having insurance. Today, insurance is not only a way of providing security in times of uncertainties, but it can also be a mode of investment.
Life insurance, one form of insurance, has become more and more popular over the last two decades, due to its savings and investment opportunities. By definition, life insurance is a policy taken against the life of the insured.
The owner pays premiums for a specified amount of time. When the insured passes away, a certain amount is to be paid usually to the family of the deceased.
The primary purposeof life insurance is to ensure that family members are financially taken care of after one’s passing. However, today, life insurance has evolved to provide many other benefits.
Various life insurance products enable people to accumulate a cash reserve which can be used even before the policy matures. This reserve comes in handy for daily needs, such as grocery bills and other miscellaneous expenses.
You can also choose from several investment opportunities with the aim of increasing a policy’s cash value.
Permanent life insurance encapsules the best benefits of life insurance. ‘Permanent Insurance’ is a term used to refer to all types of life insurance plans that do not expire.
It also allows the insured to accumulate cash value up to the maturation date of the policy. He/she can access the cash at any time or surrender the policy for which the insured will receive an agreed surrender value.
As attractive as life insurance may be, one might encounter some hurdles when trying to purchase a policy. Underwriting, the process by which insurance providers evaluate the risks associated with the policy, can be long and tedious.
You will need to give the insurer financial and medical records as well as other documents that have to be ascertained prior to even being considered for an insurance policy. The cost of insurance premiums may be too high for one to afford.
Even if you can manage to settle the premiums, you will still pay taxes. Although most aspects of life insurance are shielded from tax, there is still a portion that has to be paid.
Premium financing is one of the solutions to these obstacles. By definition, premium financing is a contract between a borrower and a lender, where the lender agrees to loan the borrower money to pay for the life insurance premiums.
Premium financing can be provided by the insurers themselves who include it as part of their insurance agreement. Premium financing services can also be provided by a third party, which is a delicate yet beneficial, agreement.
The premium financing contract is between the lender and the borrower, the insurer has no part in it. The role of the third party is to pay the insurance premiums on behalf of the insured.
The borrower, or the insured, will then be obligated to pay the loan and any related charges later, for most cases in monthly installments. Premium financing has proven itself handy for insurers when it comes to life insurance policies.
In the contract between the insured/borrower and the lender, the lender agrees to pay premiums to the insurer who will then repay back the money in installments. The loan can also be renewed annually until it is fully paid upon the death of the insured.
For permanent insurance, premium financing is the best way to simplify and smoothly complete the underwriting process. Insurance companies that offer premium financing services have programs that do not require one to go through the painstaking underwriting process all over again to purchase another policy.
One could entirely skip this step if they have purchased an insurance policy, given to the insured after a rigorous underwriting process, from a recognized carrier in a period not exceeding four years. With such flexible rules in place, one does not have to go through the underwriting process every time they purchase an insurance policy.
An Irrevocable Life Insurance Trust (ILIT) can also be established to protect the life insurance from estate tax upon the death of the insured. A tax provision exempts life insurance from estate tax so long as the third party owns the policy.
As of December 2015, at a record high of almost 40% of estate tax stood as a barrier which denied families a huge chunk of their inheritance. However, with ILITs one can ensure that the family does not incur such ‘losses’.
Premium financing stands to be the best way for people to get the most out of their life insurance policies.
Premium financing will make sure that the policy owner maintains a healthy cash flow as the interest charged on the loans is at 3.5%; an amount that is also repayable upon the death of the insured. With such benefits, premium financing stands to be the best way for people to get the most out of their life insurance policies, while also protecting their assets from unnecessary taxes.
David Drake is the Chairman of LDJ Capital, a multi-family office; Victoria Partners, a 300 family office network; LDJ Real Estate Group and Drake Hospitality Group; and The Soho Loft Media Group with divisions Victoria Global Communications,Times Impact Publications, and The Soho Loft Conferences. Reach him directly at David@LDJCapital.com.
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