Questions to Ask Before an Immediate Financing Arrangement
An Immediate Financing Arrangement, or IFA, pairs a permanent life insurance policy with a separate loan secured in part by the policy. It is a long-term, multi-party arrangement, and the questions below help clarify what you are taking on before any premium is paid or funds are borrowed.
What funds the premium, and when can borrowing begin?
Under a common bank structure, the policy owner pays the premium from their own resources and then borrows under the lender’s approved terms. Confirm the sequence, the timing of any advance and what the lender requires before it will fund.
What is the collateral?
The policy’s cash surrender value is assigned as collateral, and other security is often required. Ask what happens if policy values grow more slowly than illustrated or if interest rates rise. Projected values are not guaranteed values.
What are the ongoing obligations?
Annual premiums, interest payments, collateral top-ups and renewal or repayment terms continue for years. Understand how each is funded and what the lender can require if circumstances change.
What is the tax treatment?
Tax treatment depends on the arrangement and on the use of the borrowed funds. Borrowing to acquire life insurance does not by itself create an interest deduction, and any deduction for collateral insurance premiums has separate conditions. Review the arrangement with your insurance, tax and legal advisors before committing.
Who is involved?
Identify the insurer, the lender, the advisor and any bridge lender, and confirm that each party accepts the proposed flow of funds and security. A written description of the whole arrangement is the best starting point.
This article provides general information and is not personal financial, tax, legal, or insurance advice. Obtain advice relevant to your circumstances before entering a financing arrangement.
