Illiquid Estates Need Life Insurance Too. Why Not Finance It?
Most business owners, real estate developers, and real estate investors understand that their illiquid assets may grow more rapidly than their other secured investments. They also understand that it is liquidity that is needed to do this. Although life insurance is one of the best tools to create liquidity upon death when it is necessary to satisfy the ultimate estate tax, the money needed to fund a policy is not always available. Therefore, a Premium Finance Strategy is often utilized to solve this dilemma.
We recently worked with a woman who initially acquired $10 million of life insurance at a premium level of $220,000/year. Her attorney was now recommending that, based on the extensive growth and current valuations of her holdings, her need for insurance has increased to a $30 million policy. Based on her current age and health, this policy would require $535,000/year for 15 years. We were asked to see if there might be a better solution.
After shopping the insurance marketplace and alternatively using a Premium Financing Strategy, her out-of-pocket cost for a projected 15-year period had been reduced to $220,000/year for the same net benefit of $30 million of insurance. This was the exact amount of her yearly outlay being paid for her original $10 million policy that was acquired just a few years earlier.
The arbitrage created by utilizing the Premium Finance Strategy allowed this client to continue funding her family’s future estate tax liability at the same net premium outlay level. Needless to say, both she and her lawyer were pleasantly surprised and relieved that she was now able to preserve her cash flow and continue investing in the growth and acquisition abilities of her real estate portfolio.