What is an IFA?

An immediate financing arrangement (IFA) is a type of financial arrangement in which a company uses a life insurance policy to provide immediate funding for a specific purpose, such as repaying debt, funding a pension plan, or enhancing a lifestyle.

Under an IFA, a company takes out a life insurance policy on one or more of its employees and uses the policy as collateral for a loan. The loan is typically structured so that the company can make interest-only payments until the insured employee passes away, at which point the full loan balance is due. The loan can also be structured in a way that no interest is paid, and the interest balance is added to the loan balance every year. The company can then use the proceeds from the life insurance policy to pay off the loan in full.

There are a number of benefits to using an IFA as a financing tool. For example, it can provide a company with immediate access to funds when needed without requiring the company to take on additional debt or sell assets. Additionally, the interest paid on the loan may be tax-deductible, which can help reduce the overall cost of the financing.

However, there are also some potential drawbacks to using an IFA. For example, the loan balance may be due in full if the insured employee passes away before the loan is fully repaid, which could create financial difficulties for the company. If the IFA has not been set up correctly and closely monitored, the loan balance could get out of hand, causing the life insurance proceeds to be less than the loan amount. In a rising interest rate environment, the IFA concept should be reviewed frequently to make sure not changes need to be made.

Additionally, the use of an IFA may be subject to certain rules and restrictions, and it's important for companies to understand and comply with these requirements to avoid any potential issues.