Facebook  LinkedIn

Premium Financing

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 may offer high-net-worth individuals the ability to borrow the premiums to pay for an insurance policy, allowing them the use 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.

Premium financing also makes sense when the interest rate on the loan is less than the insured could earn on the assets he would have liquidated to pay the premium, or when the interest rate on the loan is less than the policy is expected to earn. An individual may want to enter into a premium financing arrangement to obtain a lower out-of-pocket cost for a policy, to minimize gift tax concerns, and to keep from using cash flow or liquidating assets to pay insurance premiums.

Minimums for most programs are $2.5 million in net worth and $200,000 a year income. The borrower must also be a bankrupt-remote entity (i.e., creditors cannot attach the individual’s assets for bankruptcy), such as an LLC or an irrevocable life insurance trust.

The goal of a well-structured premium financing program is to have the individual pay as little out-of-pocket as possible for life insurance, balanced against the risk that the interest rate of the loan will exceed the performance of the policy.

In a typical premium financing arrangement, an individual applies for an insurance policy. At the same time, the individual applies for a loan from a lender, usually arranged by the insurance company.

While the individual is being medically underwritten for the insurance policy, he is also being financially underwritten for the loan. Assuming the individual passes both tests, the policy is put in force and the financing is put in place.