Immediate Financing Arrangements (“IFA”)

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Immediate Financing Arrangements ("IFA")

Royal Rock specializes in structuring IFAs as part of financial planning and wealth management service.

IFAs are popular for high-net worth individuals as a tax-efficient way to purchase life insurance or as a tax planning strategy. IFAs allow both individuals and business owners to finance a life insurance policy to create tax deductions and ultimately transfer assets tax-free to beneficiaries, substantially decreasing estate taxes. The cash value of a tax-exempt life insurance policy grows on a tax-deferred basis.

What are the benefits of an IFA to a business owner?

  • A tax-free transfer of the death benefit to the beneficiary
  • Pay insurance premiums with lower-taxed corporate dollars
  • Loan interest charges may be tax-deductible
  • Tax-free growth of the cash value of the insurance policy, saving the insured a significant tax bill on investment gains
  • A loan allows the business to continue to access the value of the insurance policy without disposing of assets (which may trigger a taxable event) 

What are the key steps in structuring an IFA?

The key components of an IFA are as follows:

  • a business buys an insurance policy for the business owner or shareholder;
  • using the insurance policy as collateral, a loan is obtained from a bank or financial institution;
  • loan proceeds are invested back into the business or other investments.

The business will then make contributions in excess of the premiums required by the life insurance policy. This excess will build cash value on the insurance policy over time. The funds can be used to invest on a tax-deferred basis, and also the policy itself can be used as collateral for a loan.

Typically an IFA would have the following outcomes:

  • If the insured party faces an untimely death early in his or her life, then the insured party’s family (or beneficiary) would receive substantial proceeds from the life insurance policy after paying out the business loan that uses the policy as collateral
  • Upon retirement, the insured party may choose to convert the insurance policy into an annuity that provides a fixed regular and secured retirement income
  • The insured party may choose to let the cash value of the policy continue to grow overtime and pass on the entire value tax-free to the next generation 

What are Some Considerations to Take into Account for an IFA?

Some factors which need to be taken into account when adopting an IFA strategy include:

  • interest rate charged on the loan;
  • the basis of calculation for any taxable gains;
  • how tax deductions are best utilized;
  • level of taxation;
  • planning in the event of death of the policyholder
  • stability of the business’s future cash flow, which is used to fund such policy 

From Royal Rock’s experience in structuring IFAs, only 50% of the applicants can qualify for the IFA. To get you started, Royal Rock will help you achieve the following:

  1. Know the Benefits – Understand how the plan can benefit you financially to generate additional wealth from your portfolio
  2. Know the Qualification – IFAs have a stringent set of ongoing requirements. We help you understand all requirements to ensure the IFA is the right fit for you
  3. Know Where You Are – Gain a thorough understanding of your financial picture and whether it aligns with the requirements of an IFA

With Tony’s long experience with IFAs, Royal Rock can undoubtedly help put in place the right strategy to achieve optimum results for all your financial planning needs.

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