Life Insurance Premium Financing
LIFE INSURANCE PREMIUM FINANCING
Life insurance can play a major part of any financial plan. It can protect your family your business and your estate. Life insurance premium financing is a financial tool that many high net worth individuals are taking advantage of to secure the coverage and protection they want and need. Allowing individuals to obtain an appropriate life insurance policy without the need to deplete cash reserves or liquidate high performing investments, premium financing can be used as a beneficial tool to provide financial security while meeting your client's goals.
WHAT IS LIFE INSURANCE PREMIUM FINANCING?
When an individual wishes to take out a new life insurance policy they may have the option to borrow cash in order to pay the life insurance premiums. This is commonly known as premium financing. The premium finance company (also known as the 'provider') will lend the premiums to the policy owner in exchange for interest on the loan. The policy owner then uses the cash to pay the insurance company to keep the policy in-force. When the loan period ends or the insured passes away, the principal amount plus interest is paid back to the premium finance company and the owner retains the life insurance policy or collects the death benefit to be paid to the policy beneficiary less the outstanding loan value.
HOW DOES PREMIUM FINANCING WORK?
Should an individual wish to finance their life insurance policy premiums they will apply to various premium finance companies for a loan to pay the life insurance premiums on the new or existing policy from an insurance company. Upon securing loan approval from the premium finance company, the life insurance policy is typically owned by Trust. The borrower (client) will name the trust beneficiaries which may include a spouse, children, other heirs, business partners or a charity. Typically the borrower will have to post additional collateral (in addition to the life insurance policy) to qualify for the loan. Acceptable forms of collateral include a personal guarantee (some programs only require a personal guarantee for 25% of the loan balance), a letter of credit, cash or marketable securities. Upon securing the required collateral the initial loan amount is dispersed to the Trust which in turn pays the first premium on the life insurance policy. As future premium payments to the insurance company are
required, the premium finance company continues to disperse funds according to the premium schedule.
When the loan matures the policy owner may have a number of choices including continuing to finance the premiums, paying off the loan with the life insurance cash values or other estate assets or possibly selling the policy in the secondary market (also known as a Life Settlement). Should the insured pass away during the financing period, the Trust will receive the death benefit proceeds, pay off the lender and disperse the remaining proceeds to the trust beneficiaries.
WHO QUALIFIES?
While there are many variations of premium financing programs available each having their own set of qualifying parameters, generally an individual in good health with a net worth of $3 million or more can qualify. Some programs are designed for seniors age 70-85 while other programs only work for clients under age 70 (the younger the better).
WHY PREMIUM FINANCING?
1. No need to liquidate high performing investments.
2. Keep cash on hand.
3. Ability to access full insurability based on total net worth including illiquid assets.
4. Maintain current cash flow.
5. Part of an estate tax plan (transferring wealth to the next generation).
6. Avoid or reduce gift taxes
7. Provide a legacy benefit.
8. Provide a supplemental retirement plan
Premium financing is a life insurance policy that can offer many benefits to insured's with various financial plans and goals that see the value in borrowing to make their premium payments.
EPT's Premium Life Insurance websites are available to financial advisors and insurance agents with a current life insurance license.