Immediate Financing Arrangements
- Tony Gallippi, B.A.S (Hons.), CFP, CLU
- a few seconds ago
- 5 min read
A Practical Guide to Lending, Structure, and Implementation
The IFA is a powerful cash flow and estate planning tool for high-net-worth clients, but it requires coordination between advisor, insurer, and lender. A solid grasp of the mechanics ensures smoother implementation and greater client value. This article offers a comprehensive overview of the specialized lending programs available for the Immediate Financing Arrangement (IFA) strategy. A clear understanding of these mechanics is essential for advisors working with high-net-worth business owners and investors.
Understanding the Immediate Financing Arrangement (IFA)
The Immediate Financing Arrangement (IFA) is a strategy where a business owner or investor utilizes their own capital to pay for life insurance premiums, while simultaneously taking out a roughly equivalent business or investment loan from a specialized third-party lender that will be used to support continued business or investment objectives. The loan is secured primarily by the life insurance policy’s cash value. If the cash value is insufficient or if the client is pursuing 100% premium financing, additional assets may be required to secure the loan.
Here is a quick recap of the key benefits of an IFA:
Optimized Cash Flow: By borrowing against the life insurance policy, clients can preserve their liquidity and invest in other opportunities.
Tax Advantages: Interest paid on loans and the net cost of pure insurance, where the policy is assigned to a bank as collateral for a business or investment loan purposes may be tax-deductible.
Customizable Repayment Options: Clients can repay the loan using proceeds or at a time that aligns with their financial needs.
For more information on the key attributes of an IFA, including spotting the ideal clients, please refer to my Feb 2025 article: Immediate Financing Arrangements; A Game changing strategy for your clients” Immediate Financing Arrangements (IFAs)
The Role of Specialized Lenders:
Leveraging insurance is a unique type of lending not typically available through retail banking branches. Specialized lenders, such as BMO, Manulife Bank, Scotiabank, Gracie Point Financial, and Duca Financial Services Credit Union (in Ontario), have extensive experience dealing with various types of cash value life insurance policies as loan collateral. Crucially, they also understand the complex tax and legal issues necessary for the correct implementation of the IFA strategy.
The Lending Application & Underwriting Process (Timing and case minimums):
Lenders typically prefer that the life insurance policy be either approved or well into the underwriting process before a client submits an IFA loan application. If the decision to purchase the policy hinges on the ability to borrow back the premiums, it is strongly recommended to pursue a preliminary loan pre-approval concurrently with the life insurance application. This helps ensure financing will be available. After all, there is nothing worse than committing to premium payments only to later discover you don't qualify for the loan.
The entire loan application process, from submission to funding, generally takes approximately 4 to 6 weeks. This timeline can vary depending on the specific lender and the complexity of the client’s case.
Minimum Loan Thresholds:
Each lender determines its own minimum case size.
• At the lower end, some insurance lenders will accept annual loan amounts as low as $50,000 paid over 10 years (a $500,000 total loan).
• At the higher end, some lenders may require the total loan amount of $500,000 to be reached within two or three years.
• The overall size of the case is an important factor that impacts both the set-up fees and the interest rate offered to the borrower.
Required Financial Information:
Lenders conduct rigorous financial underwriting. Clients must prepare specific documentation based on whether the borrower is an individual or a corporation:
Borrower Type | Typical Underwriting Requirements |
Individual Borrowers | Net worth statement, last two Notices of Assessment, credit bureau check, and investment account statements (if applicable). |
Corporate Borrowers |
Up to three years of prior financial statements, a corporate organizational chart, and potentially a solicitor’s letter of opinion. |
In all cases, the lender will typically perform a debt servicing analysis to confirm that the client has sufficient cash flow to meet ongoing debt obligations, such as interest payments. Additionally, a policy illustration for the life insurance policy being used will also be required.
Loan Structure, Fees, and Collateral
Loan Terms:
IFA loans are typically structured as variable rate lines of credit. These loans can be repaid by the borrower at any time, or they can be called by the lender at any time.
Interest and Rates:
• Interest rates are variable and are determined based on several factors: the creditworthiness of the borrower, the total loan size, and the existence of any additional collateral.
• Lenders typically require interest to be paid on a monthly basis. Some lenders provide the option for clients to borrow back the interest they paid at the end of the year.
Fees and Ongoing Requirements:
All insurance lenders charge initial set-up fees, which vary based on the approved credit limit. Ongoing fees and the requirement for further financial underwriting vary significantly among lenders.
• At one end, a lender might provide full loan approval for 10 years, requiring only streamlined annual reviews and no ongoing fees after the initial setup.
• At the other end, lenders may require full annual financial underwriting and charge fees (potentially a flat annual rate) for increasing the credit limit.
Life Insurance Policy Type and Collateral
Suitable Policy:
Participating whole life insurance policies work particularly well for the IFA strategy. This is because they generally offer relatively high early cash values (CSV). High CSV allows insurance lenders to offer higher margin ratios, often ranging from 90% to 100% of the cash value. This type of policy also provides the potential for the policyowner to claim the collateral life insurance deduction once the policy is "on offset" and has a contractual premium.
Collateral Requirements:
The loan is secured by the cash value. Lenders generally offer loans up to the CSV of the policy. This is a widely used lending option.
Premium Financing (100%):
At the time this article is written, only two insurance lenders offer a loan amounts equal to 100% of the premiums paid (full premium financing) without requiring additional collateral, provided the insurance policy demonstrated higher early CSV.
Acceptable Additional Collateral:
If the lender requires temporary additional security, they accept specific asset types:
• A bank letter of credit.
• A non-registered investment account.
• A GIC issued by the lender or a savings account held with the lender.
• Another life insurance policy that has cash value.
• Some lenders will accept residential real estate (in the first lien position), and fewer will accept commercial real estate (in the first lien position).
The Role of the Life Insurance Company:
The life insurance carrier plays a limited but specialized role in supporting the IFA strategy.
Independent Underwriting:
The insurer underwrites the life insurance policy independently of the IFA strategy. This means the insurer does not consider the existence of the IFA loan when determining the life insured’s insurance needs or their ability to afford the policy premiums.
Support Functions:
1. Illustrations: Insurers often provide both the necessary policy illustration and the IFA strategy illustration that advisors use when presenting the concept to the client and submitting documents for the lender’s financial underwriting.
2. Assignment: The insurer executes the lender’s collateral assignment, which formally allows the lender to advance the loan funds. The insurer is then responsible for administering this assignment for the duration of the strategy.
3. Ongoing Reporting: The insurer provides in-force policy illustrations on an annual basis if the lender’s ongoing review procedures require these.
An Immediate Financing Arrangement can be a very effective strategy for high-net-worth business owners and investors when it is set up properly with the right lending partners. The key is understanding how the lending, insurance, and ongoing requirements all fit together and keeping everyone aligned throughout the process. When done well, an IFA can help preserve cash flow while supporting broader business, investment, and estate planning goals.
Tony Gallippi
Head of Advanced Planning, Insurance
QFS
