An Immediate Financing Arrangement (IFA) is a specialized, sophisticated financial strategy typically employed by high-net-worth individuals and business owners to acquire a large permanent life insurance policy without significantly impacting their current cash flow or investment portfolio. It is essentially a strategy of financing the life insurance premiums.
The IFA strategy utilizes a life insurance policy’s cash value growth potential immediately to secure a bank loan.
- Purchase Policy: The client purchases a permanent life insurance policy (usually Universal Life or high-cash-value Whole Life).
- Collateral Assignment: The policy is assigned as collateral to a bank or third-party lender.
- Loan for Premiums: The client typically pays the first year’s premium (or a portion of it) out of pocket. For subsequent years, the lender provides a loan to cover the premiums.
- Cash Value Leverage: The loan is secured by the cash surrender value (CSV) of the policy, which often grows rapidly due to high initial premium payments or a strategic policy design.
- Interest Payments: The client is responsible for paying the interest on the loan, which is typically tax-deductible if the loan proceeds are used for an income-producing purpose (a major incentive for business owners).
- Death Benefit Repayment: Upon the insured’s death, the tax-free death benefit is used first to repay the outstanding loan principal and interest to the lender. The remaining death benefit is then paid to the beneficiaries, tax-free.
Advantages of an IFA
| Advantage | Description |
|---|---|
| Cash Flow Management | Allows the client to acquire substantial life insurance coverage immediately without locking up large amounts of liquid capital in premium payments. |
| Tax Deductibility | The interest paid on the loan may be tax-deductible if the purpose of the loan can be linked to an income-generating activity, significantly lowering the net cost of the insurance. |
| Uninterrupted Investment | Capital that would have been used for premiums remains invested in the client’s existing portfolio, continuing to earn returns. This concept is often called arbitrage—the hope that the investment return exceeds the cost of the loan interest. |
| Accelerated Policy Growth | The strategy works best with policies structured for maximum early cash value growth, which in turn maximizes the available collateral for the loan. |
Important Considerations
- Financial Suitability: IFAs are complex and generally only suitable for high-income/high-net-worth individuals and profitable corporations who have a clear need for large amounts of permanent coverage.
- Tax and Legal Complexity: The tax deductibility of the loan interest is subject to strict rules (like the Income Tax Act in Canada) and requires careful structuring and ongoing compliance. Professional tax and legal advice is mandatory.
- Interest Rate Risk: Since the loan is variable and must be serviced annually, rising interest rates can significantly increase the cash required to cover the loan interest payments.
Loan Margin: Banks typically only lend a percentage of the cash value (the margin). If the cash value growth slows, the client may be required to pay down the principal or increase the collateral.
Contact us for more information and to schedule ZOOMwithMario insurance and options review.
E&OE
