follow us

Leveraged Life Insurance

What is Leveraged Life Insurance?

Leveraged life insurance refers to obtaining a loan, typically for investment purposes, based on the collateral of a cash value life insurance policy.

What are the Benefits of Leveraged Life Insurance?

Combining a cash value life insurance policy and a lending facility can provide annual cash flow advantages that eventually exceed the annual cost of maintaining the life insurance coverage. The cumulative economic benefits can also be significant as the loan and policy cash value amounts are allowed to grow and produce greater economic benefits over the duration of the policy.

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.