What is Premium Financing?

Premium Financing is a method of using funds borrowed from a third-party lending institution to pay for your life insurance premiums. In some instances, the life insurance policy is used as collateral for the loan; sometimes additional collateral is required. Generally loan interest is paid annually, while loan principal is repaid to the lender according to the terms of the loan. This method enables substantial insurance premiums to be “financed” without using all existing cash flow or liquidating certain investments.

Why Premium Financing might be the right tool for you

People who need substantial life insurance coverage for estate or business planning are often faced with a dilemma: Does it make sense to (or do they want to) use current cash flow or liquidate investments to pay the premiums?

Premium financing can offer high-net-worth individuals the ability to borrow the premiums to pay for an insurance policy, thus allowing them to maintain possession of funds they might have otherwise used to pay for the insurance.

Premium financing makes most sense when the individual has a definite need for insurance. Only when the need has been determined should premium financing be evaluated as an option that may allow the individual to retain his assets or income for use elsewhere.

The needs can be many.  For example:

•  Coverage on the owner or key person in a closely held business.  The loss of this person will set the business back, probably reduce or eliminate profits, and require an expensive and time consuming search for a replacement
• Coverage on each of the owners/partners in a business (Buy-Sell Agreement). This would provide the funds to the survivor(s) to pay off the deceased’s family and maintain control of the business after a death.
• Life insurance coverage to replace the life time earnings of a high income business owner, professional athlete or celebrity.
• Coverage to provide liquidity at death for high net worth individuals in order to pay estate taxes due at death rather than liquidation of an ongoing business concern or illiquid investment assets.  One should note that liquidation of investment assets may cause them to be taxed on the profits (income or capital gains tax) as well as be taxed by the estate tax.

 

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges; if a policy is surrendered prematurely, there may be surrender charges and income tax implications. You should consult a qualified tax professional for tax advice on your own personal situation. All guarantees are based upon the claims-paying ability of the issuer.