Prem Financing Alternative

PREMIUM FINANCING

SunSolutions for Life

SM

The Premium Financing Alternative Financial Situation: Clients with large life insurance needs are often unwilling or unable to fund premium payments from their current cash flow. Their net worth may be illiquid, for example, heavily concentrated in real estate and business assets. They may also be reluctant to convert high performing investment portfolios to cash. Such clients will usually create an Irrevocable Life Insurance Trust (ILIT) to own the insurance, which could result in significant gift tax when gifting the needed dollars to the ILIT.

Possible Solution: Premium Financing may be able to provide an alternative method for funding annual premiums and/or to minimize the gift tax issue.

Loan Interest Grantor

Irrevocable Life Insurance Trust (ILIT)

The Grantor establishes the ILIT, secures the trust loan with additional collateral, and gifts the amount of loan interest annually to the ILIT.1

Gifts*

The ILIT applies for a life insurance policy on the life of the Grantor. The Trustee borrows a series of premiums from a third party lender to fund the life insurance policy.3 The trust utilizes the insurance cash value as part of the required collateral. The Trustee then pays the annual premium to the insurance company and pays the loan interest to the bank each year as due.

The additional loan collateral may include the Grantor’s assets in the form of marketable securities or a letter of credit from the Grantor’s own banking source.2

The applicable loan rate is typically linked to an outside index such as London Interbank Offered Rates (LIBOR), plus an add-on of additional basis points. The interest rate is in effect for one year at a time and the entire loan will renew each year at the then effective interest rate.

*Subject to applicable gifting codes and regulations.

Loan Repayment

The Trustee may repay the loan at some future date while the Grantor is alive. Or Upon death, the life insurance proceeds will pass through the ILIT. The Trustee will repay the loan and the remaining balance will be distributed to the Grantor’s heirs, free of federal income and estate taxes.4

Results: In the early years of the arrangement, the Grantor’s outlay is limited to the interest due on the loan, which is considerably less than the insurance premium itself. This can minimize the problems of gifting the full premium amount to the Trust and/or the problem of liquidating assets to pay for the premium.

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FINANCING

Strategy:

Advanced Markets Group | P R E M I U M

Advanced Markets Group

Repayment Options: Several options exist for the repayment of the bank loan:  Repayment via the Death Benefit: This option keeps the loan in effect until the insured dies and the loan is repaid from the policy death benefit. This requires sufficient death benefit to cover both the insurance need as well as the loan balance. A Return of Premium death benefit option can be selected, which will track to the desired insurance need plus an amount sufficient to repay the bank loan. 

Repayment via Policy Withdrawals: If the desire is to repay the loan during the Grantor’s lifetime, the insurance policy cash value can be accessed to repay the bank loan via a policy withdrawal. An increasing death benefit can be selected (Option B which equals face amount plus account value), so that the death benefit that remains in force after the withdrawal is sufficient to provide the insurance needs of the Grantor.



Repayment via Alternate Funds: With the lower cash outflow at least in the early years of the loan program, the Grantor may be able to earn an investment return significantly in excess of the loan interest payments. These excess earnings may become sufficient to repay the loan at some point in the future. A level death benefit option would be appropriate. However, this approach must also allow for the process of gifting the funds to the ILIT since the ILIT (and not the Grantor) must be the source of repayment of the loan.

Notes:

Any gift to an ILIT that is intended to be a present interest and completed gift must be made to an ILIT which contains Crummey power language. Annual exclusion gifts made to an ILIT can be gift-tax free if they do not exceed $12,000 per individual beneficiary in 2008. In addition, lifetime gifts can be made using the lifetime gift tax unified credit exemption of up to $1,000,000. Gifts in excess of these exclusions and exemptions will be taxable gifts.

1

The amount of collateral required will usually include the life insurance cash value and will depend on the type of asset used. For example, stocks may be valued at 70% of market value while bonds may be valued 90% of face amount.

2

Banks will only allow Premium Financing with fixed interest rate products such as Universal Life. Variable Universal Life polices cannot be financed.

3

This assumes no transfer for value has been made or that the insured has had no incidents of ownership over the policy during his life. Neither Sun Life Financial nor any of its employees or representatives may give tax advice. If you have questions about your personal tax situation, please consult your financial or tax advisor.

4

This information is for general education of producers and contains references to concepts that have significant legal, accounting and tax implications. It is not intended as legal, accounting or tax advice. Clients should consult with their own tax advisor regarding the application of these concepts to any particular situation. Not FDIC/NCUA insured. May lose value. No bank/credit union guarantee. Not a deposit. Not insured by any federal government entity. Universal life insurance is issued by Sun Life Assurance Company of Canada (Wellesley Hills, MA) or in New York, Sun Life Insurance and Annuity Company of New York (New York, NY). All guarantees are based on the claims-paying ability of the issuing company, Sun Life Assurance Company of Canada (Wellesley Hills, MA), or in New York, Sun Life Insurance and Annuity Company of New York (New York, NY). All are members of the Sun Life Financial group of companies. ©2008 Sun Life Assurance Company of Canada. All rights reserved. Sun Life Financial and the globe symbol are registered trademarks of Sun Life Assurance Company of Canada. XMSD 44/240 SLPC 19205 08/08 Exp. Date 08/09 Page 2 of 2