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

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

• Lincoln
• Nationwide
• Allianz
• Securian
• Lafayette Life

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