For life insurance, borrowing might beat cash

Life insurance is an important financial tool, and you can get even more out of it by borrowing against your assets to fund the premiums

Using leverage often is an efficient way to finance life insurance. Instead of selling assets to generate the cash for premiums, you keep the funds in these investments.

As a result:

• Your money can stay in investments that are earning higher rates of return than the interest rates you’d pay by borrowing the money.
• You can stay fully invested in assets with low current returns that you believe will be more profitable in the future.

“You usually do premium financing when there’s a liquidity event in the future, such as a business sale in five years,” says Carma McCallie, Truist’s vice president of advanced sales, Crump Life Insurance Services division. At that point, you can repay the loan with the cash generated from the sale. So in this scenario, you know you’ll have a certain amount of cash in the future, but in the meantime it can continue to work for you.

Making the option even more attractive, your bank typically will charge you rates that are favorable relative to standard commercial ones, says Luis Arango, head of international wealth management at Truist Wealth.

Strategic uses of life insurance

Clients choosing to finance premiums through debt often are buying these policies for estate tax reasons, McCallie says. If you structure buying a policy correctly, you not only can help pay potential estate taxes but also might avoid a situation where your heirs need to sell assets to pay these taxes.

The key is to have the policy in an irrevocable trust from day one, typically an irrevocable life insurance trust (ILIT), says Nathan Duncan, senior vice president and planning strategist at Truist Wealth. When the policy is in an ILIT from day one, the trust owns the policy and the death benefit is free of estate taxes.

Taking this step also helps ensure there won’t be any income taxes from the death benefit for the beneficiary.

As for paying the premiums, you might want to borrow what you need instead of using cash if you don’t have the gifting capacity available, McCallie says. “Normally you might make a gift of, for example, the entire premium amount to a trust,” she says.

“But if you’ve used up all your gifting capacity, with premium financing the only thing that has to be paid is the interest, not the full premium. So it results in a substantial reduction of the amount that needs to be gifted every year to pay that premium.” In other words, you don’t need to gift as much to acquire the same amount of insurance.

Using your assets wisely

Just as life insurance can serve several purposes, from helping to pay for estate taxes to providing much-needed income replacement for beneficiaries, investment assets serve more than one purpose.

You fund investments to protect and grow your wealth. But they also can serve as collateral so that you can take advantage of life insurance’s financial planning benefits at the right price.

A holistic approach for international clients

Foreign clients can also reap the benefits of using leverage to fund life insurance premiums. But structuring the estate requires understanding tax laws in your home country, the home countries of your beneficiaries, and the U.S.

“You’re taking a holistic, multijurisdictional approach to the planning side,” says Luis Arango, head of international wealth management at Truist Wealth. In these cases, Truist can help clients to coordinate the efforts of experts in local tax laws and accounting regulations. Researching treaties for tax implications is another important step.

One advantage of using U.S.-based financial institutions as part of the solution is that the leverage available to foreign clients is very attractive compared with what they typically can get in other countries. The U.S. life insurance industry also is highly developed relative to ones in many other parts of the world, with better rates and regulation, Arango says.

Just as with U.S.-based clients, international clients employ life insurance mainly for the estate planning benefits, though some also seek it for income replacement.

Though cultural differences around insurance can present barriers to adding life insurance, foreign clients are often more open to it as a solution for estate planning after they learn about the benefits, Arango says.

“Most of our international clients hadn’t considered this solution before,” says Marcello Zaffaroni, international wealth advisor at Truist. “So it starts as an educational alternative, and then it develops from there.”