For producer use only. Not for presentation to the public. OLA 1371 1009 Premium Financing Loan Exit...

For producer use only. Not for presentation to the public.OLA 1371 1009

Premium Financing Loan Exit Strategies

2 For producer use only. Not for presentation to the public.

This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.


Premium Finance: Avoiding Erosion of Death Benefit

Sometimes it’s critical to net a specific amount of the policy death benefit. But absent proper planning, a premium finance loan that relies on death as an exit strategy will erode the death benefit.


Ways to Preserve Death Benefit:

Return of Premium (ROP) feature

Gross-up policy

Withdrawal from cash value

Growth on trust assets

Grantor Retained Annuity Trust

Premium Finance: Avoiding Erosion of Death Benefit


What is Return of Premium?

A policy option that causes the death benefit to grow every year by the amount of the annual premium.

May not exceed 4 times the face amount of base policy

Assuming interest is paid every year, borrower will be left with full face amount of base policy upon death


How Does Grossing Up the Policy Work? Borrower/Insured applies for a policy face amount

that exceeds actual insurance need

Upon death, the borrower is left with an approximate net death benefit that is sufficient to satisfy insurance need

Disadvantages to Borrower:

Bigger policy translates into bigger premiums

Permanently reduced insurance capacity


Is Withdrawal from Cash Value an Option?

Maybe. Paying off a premium finance loan through cash values may be an option if the financed policy’s cash values exceed 100% of the loan balance.

Index ULs or policies with high cash surrender value riders are a good fit


How Does Growth on Trust Assets Extinguish A Loan? Borrower can make initial gift to trust

Gift can be sheltered from gift tax by using annual gift tax exclusions and/or $1 million lifetime gift tax exemption

Growth on trust-owned assets can be used to gradually pay down the debt or completely repay the loan


What is a Grantor Retained Annuity Trust (GRAT)? An estate-planning device that allows a client to reduce his

or her taxable estate by making a deferred gift to beneficiaries at a discount for gift tax purposes1

A trust for a specified term of years to which the client makes a one-time transfer of an asset.

For the term of the trust, the client is entitled to an annuity

At the end of this term, the remaining trust assets will be distributed to beneficiaries.

1Grantor must survive the GRAT term to reap gift and estate tax benefits.

10 For producer use only. Not for presentation to the public.10 For producer use only. Not for presentation to the public.

GRAT

GRAT In Action

Client Grantor

Remainder Interest

Beneficiaries


Right Now Is a Great Time to Set Up a GRAT §7520 rate has dropped to a historic low

The §7520 rate is an interest rate—published monthly by the IRS—which is used to calculate the gift tax liability due upon the initial transfer to the GRAT

A low §7520 rate translates into reduced gift tax liability


The Effect of a Low §7520 Rate

What a Difference 2 Years Make—GRATs Compared

July ‘07 July ‘09

§7520 Rate 6% 3.4%

Initial Gift $1,000,000 $1,000,000

Grantor’s Age 60 60

% Payout 5% 5%

Term 15 years 15 years

Assumed Income/Growth

7% 7%

Gift Tax Value of Remainder

$565,275 $485,775


GRAT

13

IDGT

$10 Million Death Benefit

$3 Million Distribution

$1.5 million after-tax

remainder

Total Inheritance $11.5 million

GRAT Loan Exit Strategy

IRS

Approximately 50%

Taxable Estate Per

Self-Finance Transaction

$3 Million

$3 Million Loan Repaid


Benefits of Premium-Finance Transaction with a GRAT Loan Exit Strategy Grantor Retains Income Stream for GRAT Term

Reduced Gift Tax Liability

Favorable § 7520 rate translates into greater discount

Reduce Estate Tax Liability

Remove highly-appreciated asset from estate by transferring to GRAT and surviving term

Maximize Amount of Death Benefit Passing to Loved Ones


Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company (collectively “Transamerica”), and their representatives do not give tax or legal advice. This material is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must be urged to consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here.

Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of publication. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica’s interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects.

Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of September 2009.

For producer use only. Not for presentation to the public.OLA 1371 1009

Premium Financing Loan Exit Strategies

For producer use only. Not for presentation to the public. OLA 1371 1009 Premium Financing Loan Exit...

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