Case Study: Premium Financing

Case Study 1: Male 72

John Doe, 72, owns significant real estate holdings. He was advised by his attorney to create an LLLP to hold these assets for a number of purposes, including business succession, estate planning and asset protection. John created ABC Investments LLLP. As the managing member of ABC Holdings, John is actively involved in the day to day management of ABC Investments as well as the plans for the future growth of the business.

Due to his significant involvement with the business and the negative impact his death would have on the entire entity, John's attorney advised ABC Holdings to acquire key-man insurance on John's life. In conjunction with his attorney and insurance professional, John explored various options to pay for the policy premiums. Although paying for the premiums out of the cash flow of ABC Investments was considered, it was not feasible as the current cash flow is being reinvested in new acquisitions. Furthermore, John did not want to liquidate assets owned by the partnership to pay for premiums as the sale would cause significant income tax consequences. Life Insurance Concepts was engaged to explore the opportunity to acquire insurance by financing premiums. We discussed a two year recourse loan with John whereby ABC Investments would be able to acquire a $10,000,000 life insurance policy on John's life. Our premium finance company will lend the first two years of premium, the interest expense and the closing costs, expenses and loan origination incurred as part of the transaction. Additionally, the insured must pledge additional collateral equal to 25% of the loan amount. After the initial two year loan term, ABC Investments could decide to extend the loan or repay the loan out of current cash flow and continue to pay premiums to keep the policy in force. ABC Investments decided to finance the life insurance policy of John's life. Below is a summary of the loan.

Case Study 1: Summary