Do any of the below resonate with you?
- I hold traditional investments inside my holding/operating company
- I am looking to diversify my holdings towards an alternative tax-advantaged asset class
- I want to increase the internal rate of return on my estate plan.
- I want to maximize the Capital Dividend Account balance (corporate IFA).
- I have an existing permanent insurance plan with cash value and want access today.
- I want to set up a charitable giving strategy without affecting cash flow.
Did you know that you can leverage permanent life insurance policies using immediate financing arrangements?
| This is a sophisticated strategy for high-net-worth individuals or corporations that involves leveraging your permanent insurance plan so annual cash flow is not adversely affected. |  |
How an IFA works
- You enter into a contract for a permanent life insurance policy which creates significant Cash Surrender Value (CSV) in the policy’s early years.
- The policy is assigned to a bank as collateral to secure a line of credit.
- You pay the annual recurring insurance premium.
- You borrow back up to 100% of the CSV. (Or borrow back the entire premium by providing additional collateral security.)
- You use the line of credit for investment purposes – for example, to fund an operating business, purchase real estate or invest in a non-registered investment portfolio.
- Steps 3-5 are repeated annually.
- When you pass away, the outstanding loan is repaid out of the death benefit and the remaining proceeds are paid to your beneficiaries.
The two most common IFA structures
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100% Cash Surrender Value Lending |
100% Replacement of Premium |
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100% Cash Surrender Value Lending With this strategy, you borrow only 100% of the CSV of a policy each year which is, of course, less than the premium payment. The advantage to this structure is that the CSV of the policy creates a rapidly increasing borrowing capacity over time. The drawback is that there is a significant net funding requirement from you in the early years of the policy. |
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100% Replacement of Premium With this strategy, you pay the annual premium then provide extra collateral security – in addition to the CSV of the policy – in order to borrow back 100% of the premiums each year. The advantage of this structure is that you experience only a modest net cash outflow (net annual interest costs) in comparison to the death benefit, which increases the rate of return of the structure. The drawback is the requirement to provide additional collateral security. (However, the additional collateral security requirement may well fall and eventually disappear over time.) |