A clever wealth
Life Insurance for Businesses
Traditionally, life insurance protects the insured's family. A more modern and innovative approach is to use life insurance for business purposes as well.
Large amounts of life insurance cover can be used to:
- care for a family and better manage wealth distribution and inheritances;
- cover death/estate taxes;
- fund philanthropic interests;
- protect assets; and for
- business planning e.g.
- executive benefits;
- Buy-Sell agreements between business partners; and
- key person insurance for senior executives.
If cashflow from a business is better spent growing the business, then you can borrow to pay the premiums.
Why borrow to pay premiums?
Purchasing life insurance using premium financing is an innovative, financial strategy, and ensures:
- the ability to secure larger amounts of insurance cover;
- tax-deferred growth on capital; and
- capital from which one can make withdrawals, or take out tax-free loans.
Borrowing makes financial sense if cashflow/money, which might have been spent on premiums, can earn a higher return than the loan costs, say by continuing to acquire, grow and preserve other business assets.
Borrowing means not having to sell assets in a "down" period, to pay premiums.
Premium loan process
Premium-financing involves two separate financial instruments, and the application process takes place in two stages.
Step One: The application for a life-insurance policy. The client’s agent submits an application for the life-insurance policy. The life insurance company completes the medical and financial underwriting to determine whether the client qualifies for the policy.
Note: that normal considerations regarding timeliness and complexity should be given to the processing of large cases.
Step Two: The application to borrow the premium after the policy is approved, the agent submits the case to lenders who decide whether or not to lend the money for the premiums. The lender analyzes the borrower’s credit and financial status, availability of collateral etc., and decides whether or not to make the loan.
How life insurance helps
Upon death, instead of selling assets to cover debts, taxes etc., life insurance proceeds can be used to pay:
- others if an inheritance are insufficient or unfair;
- taxes e.g. death/estate taxes;
- business or family debts/expenses; and
- philanthropic commitments.
Business succession and continuity
Life insurance can help fund payments to a business partner's relatives after that partner's death.
Additionally, the remaining partners can use the life insurance policy proceeds to buy the deceased’s equity in the business. That cash in turn can provide money for the surviving family of the deceased.
A valid investment tool
A properly designed life insurance policy is a clever asset. It offers investment diversification which protects against market fluctuations in stocks, bonds and real estate.
Life insurance qualifies for significant tax benefits including tax-free death benefits in most countries. The policies also allow the cash value inside the life policy to grow tax-deferred.
You can also access the cash value of life insurance policies on a tax-favored basis through withdrawals or policy loans. For example, you can withdraw cash from a life insurance policy on a First-In, First-Out basis. This means that withdrawals up to the amount you have paid in (the premium) are considered tax-free.
To protect physical assets a Private Placement Life Insurance policy can be put in place. For more, click PPLI
Beware the detail
A successful strategy means:
- protective insurance policies;
- correct legal structures;
- appropriate jurisdictions;
- sophisticated banking; and
- specially structured investments.
In addition, policies have to be compliant with the legal and tax requirements of home country or country of tax residency of the client.
(Savvy advises on compliant policies for over 25 countries. We have a broad network of internationally experienced and independent financial and legal specialists.)
One size doesn’t fit all. Your wealth planning solutions should be as unique as your specific situation, preferences and goals.
To develop effective and innovative long-term strategies, the better wealth planning solutions have the following key characteristics.
Security Plan assets are managed by regulated and highly rated international companies.
Flexibility Solutions are designed to adapt as your needs and objectives change over time.
Efficiency Solutions often provide favorable tax and cost benefits.
Liquidity Plans are designed to deliver liquidity precisely when needed.
Clarity Solutions are clear, understandable and supported by contractual agreements.