Premium financing life insurance is when a third-party loans you money for life insurance premiums. The lender charges interest and the borrower (the policyowner) typically pays interest on the loan. The loan can be paid off with the cash value in the policy or outside funds. Some premium financed policies are designed to pay back the loan upon death.
Many high net worth individuals may use this strategy to avoid liquidating assets or using their cash to pay for expensive life insurance premiums. We are also finding that more consumers are using premium financed life insurance to provide a tax free income stream to supplement retirement.
Why Use Insurance Premium Financing?
When it comes to insurance and premium financing, here’s why you might consider this method of payment. The majority of Americans need some form of life insurance to make sure their surviving family members would be financially secure if the insured dies unexpectedly.
Premiums can vary significantly depending on the type of policy (term, whole life, etc.), your current age, your current health, and the amount of the death benefit of the policy.
The most ideal policy for premium financing is indexed universal life insurance.
When it comes to financing premiums, there are a number of benefits. For instance, they can help reduce or eliminate the policyholder’s annual out-of-pocket expense, increase the death benefit and/or cash value, or accomplish both.
Risks that Must be Considered
Market conditions are always changing, and not all strategies are suited for all individuals. However, there are various risks that should be considered before making any decisions. These include (but aren’t limited to):
Interest Rate
Although premium finance interest rates are currently very low, they are edging up in 2022 due to several underlying world events happening. If rates go up it can present a higher risk to the policyholder. In most cases, the premium finance loan contains a variable rate of interest, and currently, that’s a very positive position to be in, however, if rates begin to go up, it can reduce the advantages the applicant was looking for, in the first place. To combat this, rates are stress tested as well as policy returns.
Qualification Risk
Lenders usually require borrowers to re-qualify when the loan is renewed. However this is usually 3-5 years later when the policy has accumulated much cash value. The collateral that the policy has will most certainly help in obtaining a favorable renewal loan. If collateral is still needed for the loan this is also re-evaluated. If it falls below a certain amount, the borrower must provide additional collateral against the loan.
Your Policy’s Earning Risk
If your policy underperforms, you could be put in a situation where the balance of the loan would become more than the value of the collateral. If this happens, the lender would likely demand more collateral.
Who is Best Suited for Premium Financing Life Insurance?
Premium financing is typically used by high-net-worth individuals. Generally, these individuals have a net worth starting at $5 million. Premium financing is for those comfortable with leverage. We find that most of our wealthy clients have and will continue to use bank money to fund growth opportunities because they understand how leverage works. It is imperative that an experienced aggregator that has access to favorable borrowing rates and ideal life insurance instruments be used in this process.
The Benefits of Premium Financing Life Insurance
Although we discussed the risks associated with premium financing, you should also be aware of the many benefits of buying life insurance using third-party financing.
- Applicants can purchase a considerable amount of life insurance without the need to liquidate any assets to pay for it.
- Additionally, the applicant can reduce or even eliminate estate taxes by placing the life insurance in an irrevocable trust thereby saving heirs from paying estate taxes on the insurance proceeds.
- Another benefit of premium financing life insurance costs is the money that is paid to the irrevocable life insurance trust to fund the policy can later be deducted from estate taxes, thereby reducing the amount of the gift tax on your estate.
- Businesses often rely on life insurance policies to protect against key employees or partners passing away. Policies for key person life insurance or buy/sell agreements can be quite expensive. Taking out a life insurance policy for these types of business continuation needs can be cheaper when purchased using premium financing.
Choosing the Best Lender for Life Insurance Premium Financing
Traditionally, banks have been more receptive to insurance premium financing but like almost everything insurance-related, third-party lenders have become more aggressive in financing life insurance purchases, especially for high-net-worth clients.
We have banking relationships that we match our clients with. These are large banks that are very experienced with life insurance premium financing.
Although many private banks continue to offer premium financing, they are demanding more restrictions and conditions when making the loans. In fact, many banks have begun reducing their loan to value ratios and are tightening the borrowing criteria for their clients,
Even with changes in the premium financing marketplace, high-net-worth clients typically maintain positive relationships with bankers and generally have no problems with convincing their preferred lender to finance a large life insurance policy when there is sufficient collateral to back up the loan. Moreover, as with any loan offered by a lender, clients, whether current or former, typically have the ability to shop with multiple lenders for life insurance premium financing with the most favorable terms.
