Why Choose DePaul?
At the DePaul Group, we understand the importance of recognizing the many variations that life insurance can be funded with and how to use it to your strategic advantage. One of the most powerful aspects of these loans is that they allow for design flexibility that ensures your clients get a loan that works for them. For example, some loans may be structured so that the cash values building up within the financed policy can be accessed by the owner to pay future premiums to keep the policy in force or to make interest and principal payments. Owners can also choose to add additional benefits to the policies in order to cover other expenses that could occur upon the death of an owner. These additions might be unaffordable when trying to self-fund the policy premiums, but through premium financing they can be within reach. We have the ability to structure a wide range of solutions including: traditional premium financing for Life and Annuity policies, COLI, Key Man Policies, Group Life policies, Insurance-collateralize commercial loans. This extremely versatile way of handling life insurance can be great for the insurers we do business with. To learn more, we encourage you to review our site and call one of our licensed financial professionals at
1-855-488-4527.
Welcome to The DePaul Group
The DePaul Group is a diversified financial services company and leading premium finance provider. To do so, we utilize specialized life insurance premium finance structures. These structures and transactions allow individuals from around the world to finance large amounts of life insurance, funding and securing the loan primarily through the policy itself. These structures are of particular value in charitable, business and/or estate planning, providing a source of capital without interrupting the cash flow of the client's investment portfolio.
We have developed a wide range of products around financed life insurance. Premium financing is a policy-funding strategy that appeals to clients who need life insurance, but do not want to liquidate assets to pay for it. When financing life insurance premiums, an individual borrows the money from a third-party commercial lender. The client is eventually responsible for paying back the loan with interest. However, the internal tax-free cash value growth inside the sizable life insurance policy can potentially be used to cover some or even all of these costs. Other accumulated assets, the policy’s death benefit or a combination of these asset classes can also be used to repay the loan.
Business Succession Planning
Businesses can use premium financing in a variety of different ways. A business might borrow the funds to obtain life insurance for key-person coverage, finance a non-qualified deferred compensation plan, set up a death benefit only plan for a key executive or obtain coverage for a buy/ sell arrangement.
Key-Person Insurance
Corporate Owned Life Insurance
The premium for a properly designed key-person life insurance policy can be aggressive because the death benefit must be large enough to help your client’s business deal with the total costs related to the key-employee’s death and replacement. If you select a death benefit that adequately covers the potential expenses and losses and ensures that the business is able to preserve its financial security, it can be difficult for a business owner to free up the capital needed to pay that premium, especially if there are multiple key-employees who should be covered. Through premium financing your client may secure the policy without personal or business collateral as the policy itself secures all – or a portion of - the loan.
Corporate Owned Life Insurance (COLI) provides companies with a wonderful tool to create an invaluable asset. COLI can provide the wherewithal to fund many opportunities for businesses. Frequently supplemental executive retirement plans (SERPs) and other non-qualified deferred compensation plans are funded with this tax advantaged tool. Using an alternative means to acquire life insurance may be an attractive alternative for getting the benefits of life insurance without potentially jeopardizing your assets’ ability to earn interest.
Buy-Sell Agreements
Group Life Insurance
Insurance premiums for policies that are used to fund buy-sell agreements can be substantial and can be difficult for many business owners to manage. For cross purchase agreements, the personal requirement to pay premiums can take a substantial amount out of each owner’s income. With redemption agreements, the company must have enough cash on hand to pay for all of the policies, regardless of how expensive the premiums might be due to the health or age of some of the owners.
The DePaul Group’s life insurance funding strategies create an alternative means to pay necessary premiums without tying up company cash or personal income.
By utilizing the DePaul Group’s life insurance solutions, individual owners and corporations can easily fund buy-sell agreements using life insurance policies with death benefits that will fulfill the obligations brought on by the valuation methods chosen.
Charitable Planning
Charitable Planning
For individuals looking to provide financial support for a favorite charity in their estate plan and reduce estate taxes, a Charitable Remainder Trust can be an effective tool. The donor can remove property from the estate, provide a lifetime income stream for themselves or other family members, and at the same time benefit their favorite charity(ies).
The trust pays the donor an income stream. At the donor’s death (or the end of the trust term), the remaining assets are distributed to the charitable organization(s) selected. The donor receives an immediate income tax deduction, as well as a gift tax deduction, at the time of the initial transfer to the trust. The amount of the deduction is determined by several factors, including the length of the trust, the percentage payout and applicable federal rate. The donor will also receive an estate tax deduction for the amounts passing to charity upon his or her death. If the noncharitable income beneficiary of the trust is someone other than the donor or the donor’s spouse, the amount of the income stream may be subject to gift tax liability. By gifting a premium funded policy outright or naming a charity as beneficiary, a person can provide the charity of their choice with a large sum of money that can provide a lasting legacy to religious organizations, civic organizations, clinics, hospitals, colleges, or universities.
Estate Planning
Estate Planning
When used properly, life insurance can be a very valuable tool. Life insurance plays a critical role in estate planning. Wealthy individuals and successful entrepreneurs can minimize the level of estate taxes they have to pay – while addressing end-of-life business obligations – through the smart use of life insurance. Life insurance is a key component of many Clients’ estate plan with the policy owned by an irrevocable life insurance trust (ILIT or Trust) for the benefit of the Client’s spouse, children, grandchildren and subsequent generations. The question that must be addressed is, “What is the best way to pay for the coverage?” Premium financing can be an attractive funding strategy that compliments other non-life insurance estate planning strategies. During the early years of the plan, the annual loan interest is substantially less than paying the full annual premium, resulting in smaller initial gifts to the ILIT to fund the coverage.
Our Process
As a high-net-worth individual, you’ve taken steps to maximize your wealth. You’ve invested significant time and effort in managing your money and balancing risk and return objectives. As your wealth has grown, so has your potential need for life insurance. Life insurance can play an important role in helping you transfer federal estate tax-free wealth to your beneficiaries. If you have a significant life insurance need, but prefer not to liquidate potentially high-performing assets or family-limited partnerships to pay for premiums, there may be a better way.
Commercial Premium Financing is an opportunity to purchase life insurance without disrupting your current investment portfolio. 1) It involves borrowing money from a third-party lender to pay for premiums. 2) The idea is that you borrow at a loan interest rate that is currently lower than what you expect to earn on investments or other assets. Insurance protection is obtained with minimal disruption to your portfolio, using your assets as collateral. At a time in the future, you pay back the loan principal with a planned rollout technique or, if death occurs earlier, the death benefit will pay the debt.
How does Premium Financed insurance work?
The bank will finance the premiums for the insurance policy, taking an assignment on the death benefit to cover the loan plus interest. The policy is owned by an irrevocable trust or ILIT that designates the beneficiaries of the death benefit over and above the assignment to the lender. The bank pays the premiums directly to the insurance company. The insured will post collateral to any extent there is a difference between the policy cash value and the loan balance. In most cases, the principal of the loan is repaid to the lender at the death of the insured although there are generally no prepayment penalties should the client wish to retire the loan either with funds from the cash values in the policy or from estate transfer techniques. Alternatively, the owner may consider (a) refinancing the loan, (b) creating a lifetime income stream from the cash value during the life of the client, (c) using the cash value to purchase a single premium immediate annuity, or (d) converting the policy to a paid-up policy for a lesser face amount. The following demonstrates some of the Potential Benefits to You:
-
High-Performing Assets Kept Intact: With a premium funded alternative, you can acquire the life insurance coverage you need without liquidating high-performing assets.
-
Out-of- Pocket Expense: With a premium funded alternative, your required out of pocket expense may be reduced and/or eliminated depending on the strategy employed.
-
Interest Rate on Borrowed Funds: With a premium funded alternative, your interest rate on borrowed funds may be less than the rate you expect to earn on your investments.
-
Reduced or Eliminated Gift Tax Liability: You may be able to reduce or potentially eliminate any gift tax liability associated with the funded policy. The grantor will generally need to gift the interest payments only, rather than the entire premium payment.
Exit Strategies
“I’m prepared to finance premiums, but I want to make sure I have a clear exit strategy in place. What are my options?”
The conversation about how to roll out of a commercial premium finance arrangement can be very unpleasant if a contingency plan is not already in place. If prior to the Insured’s death, the transaction passes a crossover point when financed premiums become more expensive than paying for them outright, the borrower may elect to terminate the loan and repay the lender. Typically, an irrevocable life insurance trust (ILIT) is the owner, beneficiary and borrower when life insurance policies are financed, and any early repayment would come from ILIT funds. Additionally, loans and withdrawals may reduce the face amount of the policy and increase the chance a policy may lapse. The issue is how best to fund the ILIT, so it has options aside from the Insured’s death to satisfy the loan debt. The DePaul Group can help you be proactive in this area by providing the following list of possible exit strategies to help fund an ILIT.
Death of the Insured
Client Profile: Anyone
Assuming the Insured dies during the term of the loan, the loan balance is paid off with the death benefit proceeds. The addition of a return of premium rider is often used with this strategy in order to provide an adequate net death benefit to beneficiaries once the loan is repaid. Although this may be viewed as a common exit strategy, long-term loans carry additional risk, making it important to consider an alternative strategy, especially where the life expectancy of the Insured is greater than 10–15 years.
2. Pre-Fund the ILIT
Client Profile: Anyone
Gifts are made to fund the borrower ILIT to pay loan interest and possibly create a side fund. That borrower ILIT side fund may be used in the future to pay off the loan principal.
3. Cash Surrender Value of Policy
Client Profile: Insured purchases a life insurance product with more upside cash value potential than traditional fixed UL product, such as an Indexed UL policy sold as a non-MEC (modified endowment contract) policy.
Life insurance policy cash surrender value may be used to repay all or a portion of the loan, while leaving the policy intact after the loan is repaid. The type of life insurance product and the premium-funding stream are important to consider. Although it is an option to take loans and withdrawals from the life insurance policy’s cash surrender value to repay the loan, the cash surrender value may not be sufficient to completely repay the Lender and leave the necessary death benefit to the ILIT.
4. Grantor Retained Annuity Trust (GRAT)
Client Profile: Insured owns highly appreciating and/or income producing assets.
An asset is transferred to a GRAT and the grantor retains a fixed annuity for a certain term. The taxable gift to the GRAT is calculated as the fair market value of the asset minus the grantor’s retained annuity interest. The terms of both the GRAT and the loan can be matched so that remainder interests of the asset originally gifted to the GRAT will benefit the borrower ILIT at the same time as loan maturity. Those assets can then be used to repay the loan.
5. Installment Sale to Intentionally Defective Irrevocable Trust (IDIT)
Client Profile: Insured owns highly appreciating and/or income-producing assets.
An IDIT sale is an arrangement in which a transferor makes a deferred sale of an appreciating or income-producing asset to an irrevocable trust. The borrower ILIT is named the beneficiary of the IDIT. At the end of the deferred sale term, when the IDIT makes the final installment or balloon payment to the transferor, any remaining assets in the IDIT will benefit the ILIT. Those assets can then be used to repay the loan.
6. Grantor Loan to ILIT
Client Profile: Insured has the assets to repay the loan but does not have the gifting capacity to get the assets into the ILIT.
Grantor makes a lump sum loan to the ILIT. Interest rate is locked in at the Applicable Federal Rate (AFR) in effect at the time the loan is made. Either the ILIT pays interest to the grantor annually or the interest is accrued. Assets loaned to ILIT are used to repay the premium lender.
7. Charitable Lead Trust (CLT)
Client Profile: Insured is charitably inclined and owns highly appreciating and/or income-producing assets.
CLTs may be utilized in the same way a GRAT or sale to an IDIT may be. The client donor transfers an asset to the CLT and the trust distributions are made to a charity not less than annually over the term of the trust. The ILIT is named the remainder beneficiary of the CLT, and at the end of the CLT term the remainder assets pass to the ILIT. Although CLTs are subject to complex rules and limitations, a CLT may meet client goals involving charitable gifts and reduce an Insured’s taxable estate.
Frequently Asked Questions
What is Commercial Premium Financing?
Commercial Premium Financing is an innovative wealth management strategy offering high-net-worth individuals an alternative method of funding life insurance premiums. With Commercial Premium Financing, funds needed to pay premiums are borrowed from a third-party lender so that the borrower’s current investment portfolio or other assets may continue to potentially grow. It is also a way for clients to minimize out-of-pocket costs and gift-tax liability.
Who can be a lender?
The lender selection can vary depending on case size and circumstances of the planning situation. Loans may be available from a client’s own bank or from providers who specialize in this market. Loan terms and interest rate competitiveness should be considered. It is also advisable to choose a lender with good financial stability.
What type of credit verification may be needed for eligibility?
In addition to a signed life insurance financing credit application, a lender may also require:
• For corporate/business-owned cases: Audited corporate financial statements and tax returns for three consecutive years and a copy of the Articles of Incorporation. If the business is an S-Corporation or closely held business, signed tax returns and personal financial statements for three consecutive years on each owner/partner may also be required.
• For trust-owned cases: Statements of trust assets and trust tax returns for three consecutive years and a copy of the Trust Agreement. If a trust is newly formed, personal tax returns and financial statements for three consecutive years on the individual who is securing the loan on behalf of the trust may also be required.
Additional information may also be required by the lender for loan approval.
What is considered sufficient collateral to secure the loan?
In all cases, the lender will require the borrower to assign the policy as collateral and, if needed, will require additional collateral. They may include marketable securities, letter of credit or cash value of other life insurance policies. At the time the policy cash values exceed the loan balance, the lender may begin to release the additional collateral consistent with the lender’s loan policy.
The borrower will be responsible for maintaining adequate collateral throughout the life of the loan. Types of collateral should be discussed with each individual lender.
Who is the ideal client for this plan?
Most lenders will require the borrowers to be entities — including corporations, trusts, partnerships and limited liability companies — and, in limited cases, individuals. Your goal should be to purchase life insurance with funds borrowed at a rate lower than what you expect to gain from other investments. Additionally, as specified by the lender, individuals should have a net worth of at least $5 million, meet the collateral requirements and purchase a policy with a minimum annual premium of $100,000.
What is the current loan interest rate available from the lender?
In most instances, lenders base the current loan interest rate on the one-year London Interbank Offered Rate (LIBOR) or the Prime rate, generally assessing a spread. The spread is determined on a case-by-case basis and is generally fixed for the life of the loan. The loan amount and the lender’s risk exposure are also taken into consideration when determining the loan interest rate. Note: LIBOR and Prime fluctuate and, therefore, the interest rate received may differ from what was initially illustrated.
What is LIBOR?
LIBOR is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in the U.S. capital markets and can be found in the Wall Street Journal. In general, LIBOR interest rates are lower than the Prime Rate.
What is Prime?
Prime is the base rate that banks use in pricing commercial loans to their best and most creditworthy customers. The rate is determined by the Federal Reserve’s decision to raise or lower prevailing interest rates for short-term borrowing.
When is interest payable?
The borrower may pay the interest at the beginning of the year. However, in certain circumstances, the interest may be paid in arrears. In select circumstances, the interest may be deferred and added to the balance of the loan.
How long will it take to secure the loan?
Typically, a lender will begin its financial review of the loan application during the life insurance underwriting process. At that time, provided all documentation is complete, the minimum loan review and funding time will vary by lender, but should be between two and four weeks.
Will I have to requalify for the loan in subsequent years?
The lender will annually reevaluate loan quality to determine whether changes in the borrower’s financial condition or in the relationship between cash values and the outstanding loan balance may require additional collateral or may warrant discontinuance of future loan installments due to increased risk.
What is the purpose of the collateral assignment?
The collateral assignment grants the lender a security interest in both the life insurance policy’s death benefit and the policy’s cash value. Generally, this is an absolute assignment and therefore they remain inaccessible to the policyowner until the assignment is released by the lender. The collateral assignment includes the borrower’s representation and warranty that no bankruptcy proceedings are pending and that none of the borrower’s money is subject to an assignment for the benefit of creditors
Contact
“No financial matter may be as important to you as planning for both your future and your family’s future. We understand the importance of recognizing the many variations that life insurance can be funded with and how to use it to your strategic advantage.”
Contact The DePaul Group today speak with one of our licensed financial professionals for a free life insurance evaluation today.
Or fill out this simple form* to send us an email. We should be able to get back to you within one business day.
Turn Your Insurance Into Assurance
