Premium Finance for life insurance

Life insurance premium financing involves taking out a third party loan (individually or as part of a group) to pay for a policy’s premiums.  As with other loans, the lender charges interest, and the borrower (the insured, in this case) repays the loan in regular installments until the debt is satisfied or the insured passes away, in which case the balance is typically paid off with insurance proceeds. Loan payments may also be taken from the cash value of the policy if structured properly. 

This strategy may be useful to High Net Worth Individuals  (HNWIs) who don’t want to liquidate assets to pay for costly life insurance premiums outright. But is the practice too risky?

• Life insurance premium financing uses borrowed money to fund insurance policy premiums.
• Those with very large life insurance policies may find this option attractive in lieu of liquidating assets to find the cash.
• The higher the amount of your life insurance policy, the more costly the premiums on it. 
• Three areas of risk for insurance premium financing are qualification risk, interest rate risk, and policy earnings risk.
• One concern would be that the cash value of the policy may not increase as fast as the interest rate, which would result in a Capital Call. 
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A recent study showed that nearly 52% of Americans have a Life Insurance policy to make sure their loved ones would be financially secure if the insured passed away.

Premiums vary greatly depending on policy type, your age, your health (and health habits), and, of course, the size of the policy.

Because premiums can easily cost upward of $100,000 or more a year, premium financing can make sense since it allows people to borrow at a rate close to a benchmark short-term rate while keeping the money they would have spent in investments that yield a higher Return on Investment.  Premium financing can also prevent the insured from triggering Capital Gains Tax had they liquidated assets to let them pay for the premium upfront.

If you are interested in Premium Financing, please feel free to call and let's discuss if you are a candidate, the process, costs, and benefits.