What is Premium Financing Life Insurance and How Does It Work?

Shawn Plummer

CEO, The Annuity Expert

As a business owner, you know that many expenses come with running a company. One of the most important is ensuring that your employees are protected in case something happens to them while on the job. This can be done by purchasing workers’ compensation insurance. But what if you can’t afford the premium? That’s where premium financing insurance comes in! This guide will discuss what premium financing insurance is and how it works. We will also provide tips on getting the best rates for your business.

What Is Premium Financing?

Premium financing is a life insurance policy that allows you to finance your premiums using a loan. This can be a helpful way to pay for your life insurance if you don’t have the cash on hand to pay the premiums upfront.

Premium financing loans typically have high-interest rates, so it’s important to compare offers from different lenders before taking out a loan. You’ll also want to make sure you can afford the monthly payments on the loan, as defaulting on the loan could result in losing your life insurance policy.

If you’re considering premium financing insurance, compare offers from multiple lenders and carefully consider the terms of the loan before signing anything.

How Does Premium Financing Life Insurance Work?

Life Insurance Premium financing is a policy funding method in which the policy owner borrows money from a lender to pay the life insurance premiums. The borrowed funds plus interest are repaid with proceeds from the policy’s death benefit.

Policyholders who use premium financing generally have a high net worth and significant assets and are looking for creative ways to minimize gift and estate taxes.

What Are The Benefits

There are several potential benefits of life insurance premium financing to review before purchase, including:

  • The ability to keep your life insurance policy if you experience financial hardship and can’t afford the premiums
  • The ability to use leverage to increase the death benefit of your policy
  • The potential to earn a higher return on investments if the interest rate on loan is lower than the rate of return on the life insurance policy
  • The ability to deduct the interest paid on a loan as an insurance expense

Are There Any Risks With Insurance Premium Financing?

There are several risks associated with life insurance premium financing to review before purchase, including:

  • The risk of losing your life insurance policy if you default on the loan
  • The risk of having to repay the loan with your own money if the death benefit is not enough to cover the loan balance
  • Certain risks of paying high-interest rates on the loan
  • The risk of having to renew the loan periodically
  • Loan interest payments and interest rate risk

Before you finance your life insurance coverage, it’s important to understand the risks and benefits involved. Review your assets, other loans, and insurance needs before considering a financing option. Be sure to compare offers from multiple lenders and carefully consider the terms of the loan before signing anything.

Helpful Hints

High net worth clients face a choice of which ways to liquidate assets to pay for life insurance coverage. Clients with highly appreciated assets will resist using their capital to pay life insurance premiums when it could be applied to assets that might provide better returns.

Numerous issues can arise when the time comes to pay for large life insurance contracts on an annual basis:

  1. High net worth clients often have their insurance owned within trusts. As a result, gifting limitations may come into play.
  2. The opportunity cost of paying an insurance premium may discourage clients with resources allocated to high-performing assets.
  3. Large, long-term commitments to insurance premium payments can be a barrier.
  4. Cash-flow timing can be an issue. For example, cash flow available for insurance premiums may be low currently, but the future sale of a business or some other large cash influx may be on the horizon.
  5. For these clients, using third-party money frees up their capital for investments. However, for the right client, premium financing may provide the solution.

Candidates For Premium Financing.

  • The proposed insured must have a minimum of $5 million in net worth and $200,000 in earned annual income if age 50+; and if under age 50, $2.5 million in net worth and at least $250,000 in earned annual income.
  • The proposed insured should not be older than 75 at the policy issue.
  • The proposed insured should be a United States citizen or permanent resident or, if a nonpermanent resident, have a nexus to the United States per underwriting guidelines with U.S.-based assets greater than $10 million.
  • A foreign trust or entity may not be the policy owner
  • A business owner with a legitimate need or business needs
  • Client with additional collateral

Best Premium Financing Companies

Next Steps

Premium financing can be a helpful way to pay for life insurance if you don’t have the cash on hand or lots of cash flow to pay the premiums upfront. However, it’s essential to compare offers from different lenders and carefully consider the terms of the loan before taking out a high-interest rate loan. Defaulting on the loan could result in losing your life insurance policy. On the other hand, if you are a high net worth with many other assets but are stranded for cash, this is an option for you. Call our insurance agents today for financial counsel.

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Frequently Asked Questions

What does premium in finance mean?

A premium is the amount of money charged by a company for the sale of its products or services through an insurance contract. In the insurance industry, a premium is the amount of money an individual or business pays for an insurance policy.

How do you finance a premium?

Premium financing is a life insurance policy funding method in which the policy owner borrows money from a lender to pay the life insurance premiums. The borrowed funds plus interest are repaid with proceeds from the policy’s death benefit.

What is a premium loan?

A premium loan is a loan that is used to pay the premiums on an insurance policy. Premium loans typically have high-interest rates, so it’s important to compare offers from different lenders before taking out a loan. You’ll also want to make sure you can afford the monthly payments on the loan, as defaulting on the loan could result in losing your life insurance policy.

How do you qualify for premium financing?

To qualify for premium financing, you generally need to have a high net worth and be looking for creative ways to minimize gift and estate taxes. Some life insurance companies may also require that you have a certain cash value in your policy before they approve you for premium financing. This type of policy has a high cost, so the insurance company wants to see additional collateral.

What is a premium finance company?

A premium finance company is a lending institution that offers loans to policyholders to pay their life insurance premiums through an insurance contract. Premium finance companies typically have high-interest rates, so it’s important to compare offers from different lenders before taking out a loan.

How do I choose an insurance premium financing company?

When choosing a premium finance company, it’s essential to compare offers from different lenders and carefully consider the terms of the loan before taking out loan. You’ll also want to make sure you can afford the monthly payments on the loan, as defaulting on the loan could result in losing your life insurance policy.

How is the premium calculated?

The insurance premium is calculated based on the type of insurance, the amount of coverage, the deductible, and the age and health of the insured.

Is premium financing legal?

Yes, insurance premium financing is legal in most states. However, some states have regulations limiting the amount of interest charged on a premium loan.

How do premium finance companies make money?

Premium finance companies make money by charging interest on the loans they provide to policyholders through a premium finance agreement. As a result, the interest rates on these loans are typically higher than those on other types of loans, so it’s important to compare offers from different lenders before taking out a loan.

What is the automatic premium loan provision?

The automatic premium loan provision is a feature of some life insurance policies that allows the policyholder to borrow money from the policy’s cash value to pay the premiums. This can be a helpful way to keep your policy from lapsing if you run into financial difficulties and cannot make the premium payments.

Can you finance an insurance policy?

Yes, you can finance an insurance policy through a premium finance company. Premium finance companies offer loans to policyholders to pay their life insurance premiums. However, the interest rates on these loans are typically higher than those on other types of loans, so it’s important to compare offers from different lenders before taking out a loan.

When did the new FCA rules on retail premium finance become effective?

The new FCA rules on retail premium finance became effective on April 6, 2016.

What is the expected life of a premium finance loan?

The expected life of a premium finance loan is the length of time over which the loan is expected to be repaid. The expected life of a loan is typically shorter than the term of the loan.

What does interest mean in finance?

Interest is the charge for the use of borrowed money. The interest rate is the percentage of the loan charged as interest.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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