Premium Financing for Life Insurance policies

Premium Financing provides clients with high net worth and / or high income levels the opportunity to acquire life insurance without liquidating assets or interrupting their normal cash flow. Through this innovative approach, qualified clients borrow the funds to pay the life insurance premiums. The client protects their net worth and assets so that it can be passed on to future generations, all without depleting current cash flow. Premium Financed policies are custom tailored to meet the needs and goals of each client.

Premium Financing has two basic steps. The first step is to complete an insurance application and submit it to the insurance company to determine if you qualify for the policy. Once the policy is approved, the second step is to submit the case to the lender. The lender will review the information provided and make a determination as to whether or not they will fund the loan. Lenders will examine items such as net worth, income and credit rating.

Estate Planning

You have worked hard to accumulate assets and the prospect of losing half to estate taxes is not very appealing. Life insurance is one of the most effective and cost efficient ways to offset potential estate taxes. The problem is that premiums are high and there is not enough cash flow to pay the insurance premiums. Premium Financing solves that problem. All premiums are paid by the lender leaving current cash flow uninterrupted. When death occurs, insurance proceeds pay back the loan first with the remaining amount going to the heirs.

Business/Personal Planning

Whether you are a business owner and/or a professional there are usually life insurance needs. It could be for key man coverage, funding a buy/sell agreement or providing income protection. Regardless of the need, premium financing gives the insured the opportunity to acquire the needed life insurance again, without interrupting current cash flow. In addition, policies can be designed to provide supplemental retirement income to the insured. Income levels will vary by insured. When policy cash values are sufficient, money from the policy will be used to pay back the loan.

Charitable Planning

Premium Financing is also a way to gift a substantial endowment on your behalf to your favorite charity, church or school without having to pay the premium cost “out of pocket”. Charitable plan design will vary depending on the requirements of the charitable organization and the insured. Please check with your tax advisor to see what tax deductions would apply. The loan can be paid back from the policy death benefit or from policy cash values (if sufficient).

Advantages of Premium Financing

A properly designed premium financed policy can be very beneficial.

  • It allows you to keep assets in investments with better potential returns
  • It reduces the “out of pocket” cash necessary to maintain the policy
  • Since the premiums are loans, there is no gift tax issues associated with policies owned by ILIT’s
  • There are exit strategies in the event you need or want to terminate ownership of the policy

Disadvantages of Premium Financing

There are potential disadvantages to premium financing.

  • Premium Financing involves a loan. These loans are fully collateralized
  • Collateral requirements for the loan will change annually and may be higher than originally projected
  • If the policy values are not sufficient, additional “out of pocket” contributions may be necessary to satisfy the lender

Eligibility Requirements

Eligibility requirements will vary from lender to lender and will differ depending on the needs of the client. The following are general requirements.

  • Must have a need for life insurance
  • Minimum Net Worth from $2 - $5 million. Minimums will vary with both lenders and insurance companies
  • High annual income levels
  • Provide acceptable collateral for the loan
  • Insurance policy issued standard or preferred

Additional Information

Interest Rates – Interest charged on the loans will vary from lender to lender. Rates are based on Libor or Prime rates plus a predetermined spread. Interest rates usually change on an annual basis reflecting market conditions. Interest changes may impact collateral requirements. In addition there are usually origination and other fees.

Financing Options – Each lender has their own rules and requirements. Some lenders require interest to be paid annually by the insured. Other lenders allow the interest and fees to accrue inside the loan to be paid back at death or from policy cash values at some later point in time. Loan duration will also vary, anywhere from two years to the lifetime if the insured. It is important the lender matches the goals and needs of the insured.

Collateral – Loans are fully collateralized making it a critical part of Premium Financing. The lender will determine the amount and type of collateral required. The policy cash surrender value always serves as the first piece of collateral. Additional acceptable collateral is determined by the lender.

Insurance Products – The life insurance products used are either Indexed Universal Life or Universal Life.