Life insurance can play a major part of any financial plan. It can protect your family or business and can be useful in estate planning. There is a financial tool available that many seniors are taking advantage of, life insurance premium financing, to secure the coverage and protection they want and need. Allowing individuals to obtain an appropriate life insurance policy without the need to deplete cash reserves or liquidate high performing investments, premium financing can be used as a beneficial tool to provide financial security while meeting your goals.
WHAT IS LIFE INSURANCE PREMIUM FINANCING?
When an individual wishes to take out a new life insurance policy they may have the option to borrow cash in order to pay the life insurance premiums known commonly as premium financing. The premium finance company (also known as the 'provider') will lend the premiums to the policy owner in exchange for interest on the loan. The insured then uses the cash to pay the insurance company to keep the policy inforce. When the loan period ends or the insured passes away, the principal amount plus interest is paid back to the premium finance company and the owner retains the life insurance policy or collects the death benefit to be paid to the policy beneficiary less the outstanding loan value.
HOW DOES PREMIUM FINANCING WORK?
Should an individual wish to finance their life insurance policy premiums they will apply to various premium finance companies for a loan to pay the life insurance premiums on the new or existing policy from an insurance company who has approved the premium finance program. Upon securing loan approval from the premium finance company, the life insurance policy is issued into an irrevocable life insurance trust, or ILIT. The borrower will name beneficiaries of the trust which may include a spouse, children, other natural heirs, business partners or a charity. Most commonly the borrower, will have to post collateral for the loan in the form of the policy itself (through a collateral assignment) and possibly additional collateral for a percentage of the loan amount (on average 25%) in the form of a letter of credit, personal guarantee, marketable securities or cash.
Upon securing the required collateral the initial loan amount is dispersed to the ILIT which in turn pays the first premium on the life insurance policy. As future premium payments to the insurance company are required, the premium finance company continues to disperse funds according to the premium schedule.
When the loan matures the policy owner may have a number of choices including the continuing to finance the premiums, repaying the loan plus interest and keeping the life insurance policy or selling the policy in the secondary market for life insurance (also known as a Life Settlement).
Should the insured pass away during the financing period the ILIT will claim the death benefit and disperse the proceeds less the outstanding loan value to the beneficiary.
WHO QUALIFIES?
While there are many premium financing companies each having their own set of qualifying parameters, generally an individual over the age of 68 who wishes to obtain a life insurance policy with a death benefit of $1 million or more may qualify though there are some programs designed for seniors age 60 and up.
WHY PREMIUM FINANCING?
Premium financing a life insurance policy can offer many benefits to insureds with various financial plans and goals that see the value in borrowing to make their premium payments.
- No need to liquidate high performing investments.
- Keep cash on hand.
- Ability to access full insurability based on total net worth including illiquid assets.
- Maintain current cash flow.
- Part of an estate tax plan.
- Provide a legacy benefit.
WHAT IS THE PROCESS?
Should you wish to explore the option of premium financing a new or existing life insurance policy your advisor or broker will work with you to obtain life insurance policy and financing offers through their insurance carrier and premium finance company networks. Once offers for a new policy (if needed) and financing are secured, the new life insurance policy issued will be issued and the first premium is then paid by the lender. The lender or premium finance company will then continue to pay ongoing premiums for the term of the loan until loan maturity or the loan is paid off.
COMMON QUESTIONS
Q. How do I know if premium financing is right for me?
A. Your advisor or broker will work with you to review your current financial plans and goals to determine if premium financing is a beneficial and viable option for you.
Q. Do the insurance companies approve of premium financing?
A. Yes, many insurance companies approve of premium financing. Some advisors and brokers work only with insurance companies, most of which are among the highest rated in the country, which have approved the various premium financing programs available in the marketplace. Be sure to ask your advisor or broker if the program you have selected is approved by the insurance carriers.
Q. Who are the premium finance companies?
A. The premium finance companies are typically either highly rated large institutions such as investment banks or providers backed by those same institutions.
Q. Can I pay off the loan at anytime?
A. Yes, most (but not all) premium financing programs allow you to pay off the loan at anytime you wish. However, there may be early payment fees assessed depending on the premium finance program you choose.
Q. What can I do with my policy after the loan matures or is paid off?
A. Anything you want, you may keep the life insurance policy and continue paying future premiums yourself, you may cancel the policy, and you may also sell your policy in the secondary market in a life settlement transaction.