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How Life Insurance has Turned Into a Valuable Hidden Asset

Last update on: Jun 23 2020

Most people do not use of all their assets. In fact, many people have assets they unaware of that could be exploited to better achieve their financial and personal goals. In this visit you are going to learn how recent changes have turned life insurance and insurability into very valuable hidden assets for some people. These developments are changing the way many people look at life insurance, turning it into an asset that can be leveraged and managed to increase wealth.

One important development is known as premium financing. Few people buy all the life insurance their estate planners recommend or that insurers would offer. Insurance premiums can be expensive, and people who need a lot of life insurance also tend to have investment options they believe are better uses of their money than paying premiums. Buying insurance can mean liquidating investments or other assets. In addition, paying for significant life insurance coverage can exhaust the lifetime gift tax exemption or trigger gift taxes.

Premium financing of life insurance does not have these disadvantages, and it can increase the benefits from owning life insurance.

Consider the case of Max and Rosie Profits. Max is 76 and in good health, while Rosie is 75 and relatively healthy. Their net worth is about $15 million, and their annual living expenses are less than $250,000. They have $1 million of life insurance between them. Their estate planner tells them their net worth is growing much faster than they can give the money tax free to their four children and eight grandchildren.

They qualify to purchase a $5 million permanent policy on each of their lives plus a $5 million policy on their joint lives (a joint and survivor policy), for a total of $15 million of life insurance. This amount of insurance would adequately cover their charitable intentions and future estate and income taxes while leaving meaningful inheritances for their beneficiaries.

Of course, Max and Rosie do not want to liquidate assets to pay the premiums. Even if they did, the premiums would exceed their annual gift tax exemptions, so there would be gift taxes due.

Instead, Max and Rosie are able to borrow to pay the premiums. The loan is backed by the policies’ death benefits and cash values plus some personal collateral from the Profits. The collateral can include a letter of credit, a personal guarantee, or cash or marketable securities held in an account approved by the lender. The term of the loan can be two years to 10 years, and the interest rate will depend on the type of collateral. If the Profits pass away while the loan is in place, the lender will be repaid from the insurance benefits, and their beneficiaries will receive the rest of the benefits. Each year, the Profits can choose to either pay the interest or let it accrue

Through premium financing the Profits obtain the amount of life insurance their estate planner recommends without having to liquidate assets, incur gift taxes, or pay cash. Details of the policies and loans are in the box.

What happens when the loan term ends? Or suppose the Profits decide they no longer need all the coverage? For example, the estate tax might be repealed or the Profits’ assets might not increase as projected.

That leads to the second important development: the life settlement industry. Barely in existence 15 years ago, it is estimated to be a $13 billion business today and projected to be $130 billion in a few years.

Life settlement involves transferring ownership of a life insurance policy to an investment firm for cash. Major firms are in this business, including Deutsche Bank, Credit Suisse, Merrill Lynch, and Warren Buffett’s Berkshire Hathaway. The investment firm becomes beneficiary of the policy, pays the premiums, and takes whatever steps are necessary to keep it in force. In most states, an insured or policy owner can transfer a policy after at least two years have passed since it was issued. When the policy was issued there must not have been an agreement to sell the policy in the future or other overt indication that the policy was taken out primarily to sell it. The amount received for transferring the policy depends on the insured’s age.

Investors are attracted to life settlements because they generate a return that is not correlated with the economy or major investment markets. Investors generally buy a share of a large number of policies that are put together by the major banks and investment firms.

In our example, after two years Max probably could sell his $5 million policy for 25% of face value, or $1,250,000. He would repay the loan and accrued interest from that, netting $844,100. Rosie’s policy probably could be sold for 22% of face value, or $1,000,000. Her net would be about $780,920. Most tax advisors say that the proceeds are taxed at the 15% long-term capital gains rate for federal income taxes. You will have to check with a local tax advisor to learn how your state will treat the transaction.

After selling those two policies, the Profits could use the proceeds to pay the loan on their joint life policy and to make a deposit that would assure payment of all future premiums. This policy would ensure estate liquidity and perhaps an added inheritance for their heirs. Or they could use the proceeds for investing, giving, or spending.

The major risk of the Profits’ plan would be that changes occur in the markets for either premium financing or life settlement so that they are not as robust as today. That is why insurance coverage should be reviewed every couple of years.

Premium financing turns insurability into an asset that can be monetized. Without currently putting up cash, selling assets, or incurring gift taxes, an estate can be increased or protected from estate taxes. Premium financing also is a way to increase charitable giving by naming a charity the beneficiary of the financed policy.

Life settlement can enhance existing insurance policies. If a policy seems no longer to meet your needs and you were thinking of letting it lapse or liquidating it, take a fresh look at the situation. Life settlement might generate more cash than the other options.

The ideal candidate for premium financing is over 65, has a minimum net worth of $3 million, and is moderately healthy.

Not every insurance agent knows about premium financing and how to use it to maximize wealth, and has contacts with the financing firms. If you or your parents are candidates for this strategy, contact my friend David T. Phillips, CEO of Estate Planning Specialists at 1-888-892-1102. Ask for their Estate Analysis and Premium Finance Profile Form. Or you can visit their web site at and click on “Estate Analysis.” Estate Planning Specialists will prepare a personalized Estate Analysis and include a comprehensive Premium Finance projection.

You likely have a valuable asset that is not being maximized. Take a few minutes to discover how valuable the asset is.

Max and Rosie Profits
Premium-Financed Life Insurance
Max Profits-Age 76
$5 milllion Universal Life
Annual Interest Annual Net Death
Year Premium Rate Interest Benefit
1 $202,950 7.70% $15,844 $4,797,050
2 $202,950 7.70% $31,688 $4,594,100
Rosie Profits-Age 75
$5 milllion Universal Life
Annual Interest Annual Net Death
Year Premium Rate Interest Benefit
1 $142,021 7.70% $11,375 $4,846,604
2 $142,021 7.70% $23,662 $4,680,920
Max and Rosie Profits
$5 million Joint and Survivor Life
Annual Interest Annual Net Death
Year Premium Rate Interest Benefit
1 $106,195 7.70% $8,177 $4,885,628
2 $106,195 7.70% $16,354 $4,763,079




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