Premium financing of life insurance can have estate, gift and income tax implications. Any reference to the taxation of life insurance products is based on understanding of current tax laws. Lion Street, Inc., and its affiliates, do not provide tax or legal advice. Please consult a qualified tax and legal professional regarding your personal situation and all tax and legal matters related to the material covered herein.
Each respective lender will have its own rules, procedures and requirements regarding the loans obtained to pay life insurance premiums. Lending terms vary by lender including, but not limited to, the type of loan (term vs. demand loan), term of loan, loan commitment (lender’s commitment to extend credit up to the total approved facility), loan rate and other borrowing costs, collateral requirements, interest payment options, annual administrative or renewal requirements and conditions of default. None of the assumptions made in this presentation with respect to various loan terms, such as the projected loan rates and collateral requirements, should be construed as indicative of terms that will be offered by any specific lender nor as a promise or offer of actual loan terms by any specific lender.
Premium financing of life insurance involves several additional risks. Two more prominent risks, generally, are that of interest rates and policy performance. If interest rates rise more, or the policy performs at a rate less, than what is projected, out of pocket costs and/or collateral requirements may increase and cash values and death benefit net of loan may decrease relative to initial projections. Also, in the event of underperformance, additional premiums and corresponding loans may be required. Other potential risks could include, but are not limited to: 1) A refusal of the lender to extent further credit upon renewal which may limit the ability to secure loans for subsequent premiums; 2) Collateral foreclosure if repayment is demanded by the lender and the loan is not repaid or refinanced with another lender; 3) Additional collateral required, a refusal to extend further credit or a demand for repayment by the lender resulting from a material change in the borrower’s or guarantor’s financial condition and creditworthiness; and 4) Additional gift tax implications, if the policy is trust owned, resulting from additional loan payments from personal assets.
All projections, and assumptions made therein, included in this presentation are hypothetical and for illustrative purposes only. Actual results will vary and may be more or less favorable than that which is projected. It is imperative, therefore, to monitor the performance of the transaction, both in terms of accrued loan values and policy performance, on an annual basis and make adjustments to the planned annual loan payments, the policy face amount or ultimate loan repayment strategy, if necessary. If the intention is to use the policy's cash value as a potential future source of repayment for the loan through a withdrawal or policy loan disbursement, it is critical to have another loan repayment strategy in place or identified as an alternative in case the policy underperforms. Life insurance values are not guaranteed and the policy owner should carefully read the corresponding product illustration and policy contract from the life insurance carrier for important information including, but not limited to, guaranteed and non-guaranteed elements.