Immediate Financing Arrangement
Immediate Financing Arrangement
An Immediate Financing Arrangement (IFA) is a financial strategy that utilizes the cash surrender value of a participating life insurance policy as collateral for a loan or line of credit from a third party.
As the value of inside the insurance the policy grows over time, the amount that can be borrowed increases as well. The borrowed funds are placed to produce income in a business or investment, otherwise the insurance asset would be underutilized. The interest paid on the loan may be deductible from the earned income.
The IFA concludes when the loan amount is paid from the life insurance death benefit.
Key Details
The needs of a business and a business owner’s personal needs often compete for scarce financial resources. During the early years and periods of growth the cash needed for business operations are typically high.
Permanent life insurance that protects an individual for their entire lifetime is required to fund the IFA. Permanent life insurance combines a death benefit and a savings component that earns income inside the policy on a tax-deferred basis. The two major types of permanent insurance are whole and universal life. Whole life earns interest at a prescribed rate, while universal offers more flexibility and variability. Permanent insurance is more expensive than term insurance since it includes additional investment opportunities, and the coverage does not end. The added expense (with corresponding benefits) is a contributor to utilize the IFA strategy.
To begin the strategy the corporation ensures the business owner’s life using permanent insurance, and names itself as the policy owner and beneficiary. The life insurance policy is then assigned to a lender as collateral for a line of credit. The corporation pays the policy premiums and the borrowing interest. The corporation is able to utilize the borrowed funds for business operations, a premises purchase, or another investment generating income. As premiums are paid, and the cash value increases, additional funds can be borrowed.
When the owner passes away, the outstanding load amount is paid directly to the lender, and any additional benefits are received by the corporation. The death benefit is tax-free. The corporation’s capital dividend account will credit the death benefit amount less the adjusted cost basis of the life insurance policy. Capital dividend can be paid to shareholders tax-free.
The Bottom Line
The ideal candidates for this strategy are successful business owners. Their business generates significant retained earnings annually, utilize strategies to grow their businesses further, leave a charitable legacy, fund operations, key person insurance, and a buy-sell agreement.