What is Premium Financing?
Premium financing enables clients who have a life insurance need to defer using their liquid assets to fund a life insurance policy. With a typical premium financing arrangement, the client (or the clients’ trust or corporation) takes out a loan from a lender in order to pay the premiums on a life insurance policy. Premium financing can significantly reduce out-of-pocket costs as well as gift tax costs on large life insurance policies.
Who is a Candidate for Premium Financing?
The candidates for premium financing are usually individuals ages 50 and older, with high net worth and who are seeking insurance with large annual premium (usually $75,000 per year and up). These individuals may have their assets largely structured in long-term investments. Premium financing lets the client leverage the cost of a new life insurance policy by paying only interest on the loan, allowing the client to maintain other investments.
How Premium Financing Works?
With a premium financed program, the potential insured applies for premium financing after being underwritten for a
life insurance policy. Once the loan is approved, the lender pays the annual premiums on the life insurance policy and the policyowner (or a trust) will only have to pay annual interest on the financed premium. The life insurance policy and other assets are used for collateral against the loan. The loan may be repaid in a lump sum, in installments over time, or at the death of the insured.
Requirements for Premium Financing?
Each lending institution has its own requirements for life insurance premium financing. Business Planning Group will assist you in securing potential lenders or, you may also consider using your own local bank. Normally, the loan must meet the following requirements:
- The insured/borrower is underwritten for a new life insurance policy and qualifies for premium financing.
- The borrower will pay interest as agreed annually as agreed with the financial institution.
- The premium loan is collateralized by the insurance policy and may also require a secondary form of collateral.
- The lender takes a collateral assignment in the cash surrender value and death benefit of the financed policy.The client may also need to sign a personal guaranty on the loan.