How does leveraged life insurance work?

The general structure of a life insurance leveraging arrangement is as follows:

• A cash value life insurance policy is acquired to meet the individual’s estate, succession or business planning objectives.
• Deposits are made into the policy to cover the required minimum premiums.
• Additional deposits are made into the policy to create additional cash values (either invested in a special account within the policy (the accumulation fund) or used to purchase paid-up additional insurance that has guaranteed cash values; or both)
• The life insurance policy is assigned as collateral to secure a bank loan (typically a variable interest credit line with a prearranged limit)
• Advances are made from the credit line and are invested for an “eligible purpose”.
• Interest is paid and the interest expense should be deductible for income tax purposes.
• On the death of the insured or insureds, the loan is repaid in full using the life insurance proceeds. The remaining proceeds are paid tax free to the beneficiary.