250-953-2307Purchase a Permanent Life Insurance Policy
First, you purchase a permanent life insurance policy. The policy is designed to provide the required insurance protection while also generating cash surrender value over time.
Immediate Financing
Arrangement (IFA)
Immediate Financing Arrangement (IFA)
Often called Permanent Insurance Need Financing or Capital Mortgaging.
Successful business owners and high net worth individuals may have a substantial need for permanent life insurance, whether for estate preservation, business succession, future tax liabilities, charitable planning or preserving wealth to the next generation.
The challenge is that substantial permanent insurance can also require substantial annual premiums. These premiums may be affordable, but committing that capital to an insurance policy can mean taking money away from a business, real estate investment or other opportunities.
An Immediate Financing Arrangement (IFA) is designed specifically to address that issue.
An IFA can be structured personally or through a corporation. The individual or corporation funds a permanent life insurance policy, assigns the policy to a financial institution as collateral, and arranges financing against the policy’s eligible collateral value. The borrowed capital can then be redeployed into a business or other income-producing investments.
The objective is not to borrow because you cannot afford the insurance; it is to obtain the permanent insurance you need while keeping capital available for productive use elsewhere.
How an Immediate Financing Arrangement Works
Pay the Annual Premium
The policy owner pays the annual insurance premium using available personal or corporate cash flow. An IFA is intended for financially strong individuals or corporations that have the capacity to fund the insurance without relying on borrowing.
Assign the Policy as Collateral
The life insurance policy is assigned as a participating financial institution as collateral for an IFA line of credit. The lender evaluates the policy, the borrower’s financial position, cash flows and the purpose of the loan.
Access Financing Against the Available Collateral
Depending on the lending structure, an IFA may provide access to financing based on the policy’s eligible cash surrender value. In some arrangements, financing equal to a percentage of the premium paid may be available.
Put the Capital Back to Work
The borrowed funds may then be redeployed into the appropriate income-producing purpose, such as an operating business, real estate or a non-registered investment portfolio.
Repeat the Annual Cycle
With prudent financial structure, the process may be repeated with subsequent annual premiums. As the policy’s eligible cash surrender value increases, the policy itself may provide greater collateral support over time.
Repay or Maintain the Loan
This is not typically structured to repay from other assets, refinance, or potentially remain outstanding until death. When the arrangement remains in place at death, the outstanding loan is generally repaid from the insurance proceeds.
Two Common IFA Structures
100 Percent CSV Lending
Under this structure, financing is based on the policy’s eligible cash surrender value. In the early years, the annual available may be less than the premium paid. As the policy’s cash surrender value grows, its borrowing capacity may increase.
100 Percent Replacement of Premium
Under this structure, the client pays the annual premium and may then arrange access to the full premium, where the policy’s eligible cash surrender value does not provide sufficient collateral.
Personal or
Corporate Structure
An IFA may be established personally or through a corporation. For incorporated business owners and professionals, this means the insurance premium may potentially be funded directly with corporate dollars after the corporation is taxed at its corporate rate.
The appropriate structure depends on where the available capital is held, who requires the insurance, the intended use of the borrowed funds, and the client’s business and estate objectives.
Potential Tax Considerations
An IFA may provide tax advantages when the borrowed funds are used for an eligible income earning purpose, but tax deductibility is not automatic.
Depending on the circumstances and the requirements of the Income Tax Act, interest on borrowed funds may be deductible in certain situations. A deduction related to the cost of pure insurance may also be available where the life insurance policy is assigned to a qualifying lender as collateral.
One Strategy, Several Objectives
- Obtain substantial permanent life insurance protection
- Restore access to some or potentially all of the capital used for premiums, subject to policy value, collateral and lender approval
- Reduce the opportunity cost associated with funding significant permanent insurance premiums
- Potentially deduct eligible borrowing costs where applicable tax requirements are satisfied
- Integrate insurance with the broader business, investment and estate planning
- Fund the strategy personally or through a corporation, depending on the ownership structure and planning objectives
- Keep capital working in a business, real estate or other income producing investments
- Build cash surrender value within a permanent life insurance policy
- Create estate liquidity for taxes, succession, family or charitable objectives
Who Should Consider an
Immediate Financing
Arrangement?
An IFA is a sophisticated leveraged strategy intended for financially strong individuals and corporations. It may be appropriate for someone who:
- Has a genuine need for substantial permanent life insurance
- Can comfortably afford the insurance premiums without relying on financing
- Has strong and predictable personal or corporate cash flow
- Has substantial net worth and borrowing capacity
- Has capital that can be productively employed in a business or income producing investment
- Wants to maintain liquidity rather than permanently commit substantial capital to insurance premiums, is comfortable with leverage and variable borrowing costs
- Has sufficient assets to provide additional collateral where required
- Has a long term estate, succession or wealth transfer objective
Understanding the Risks
An Immediate Financing Arrangement can be effective for the right client, but it introduces leverage, interest rate and lending risk. It should not be evaluated solely on the insurance illustration or potential tax deductions.
Important considerations include,
- Interest rates and the ongoing cost of borrowing
- Additional collateral requirements, particularly in the early years
- Changes to loan to value requirements
- The continued qualifying use of borrowed funds where tax deductibility is contemplated
- An appropriate exit strategy if the financing is repaid or restructured before death
- Policy cash surrender values and how they develop over time
- Lender approval and ongoing lending criteria
- Interest payment obligations
- Changes in tax legislation or interpretation
An IFA should therefore be designed and tested under different interest rate, policy performance and collateral assumptions rather than relying only on the most favourable projection.
Immediate Financing Arrangements With InsureBizz
At InsureBizz Financial Inc., we approach an IFA as an integrated insurance, financing and estate planning strategy.
We begin by examining your permanent insurance need, available personal or corporate cash flow, existing assets, borrowing capacity, intended use of the borrowed funds, estate objectives and tolerance for leverage.
We can then model the insurance and financing together to assess whether an IFA may provide a meaningful advantage compared with funding the insurance conventionally.
Where appropriate, we work alongside your accountant, lawyer, lender and other professional advisors so that the insurance, financing, tax and estate components are properly coordinated.
Keep Your Capital Working While Protecting What You Have Built
For the right individual or corporation, permanent life insurance can solve an important estate or business planning need. An IFA addresses an equally important consideration, does purchasing that insurance have to mean taking the same capital out of productive use?
A properly structured Immediate Financing Arrangement can potentially provide the insurance protection you need while allowing capital to remain available for your broader business, investment and wealth creation objectives.