Premium Financing

Premium Financing.

Although the benefits of life insurance are clear, the desire to pay large annual premiums is not always there. Paying premiums means disrupting your normal cash flow, which in turn takes away from your personal, real estate and/or business investment strategies. In these cases, finding liquid cash to cover insurance premiums can be very difficult as well as unrealistic.

What if there was a way to obtain the life insurance you need without disrupting your cash flow? What if you could solidify your family’s financial future without the high out-of-pocket costs?

By borrowing funds from a third-party lender to pay for the insurance and using the policy as security for the loan, the need to make large annual premium payments is gone! Now you have more freedom to invest in other strategies and diversify your assets!

Premium Financing FAQ

Below are some common questions about premium finance that will help you better understand what it is and how it works:

Q. Do I have to meet any requirements to qualify for premium finance?

A. Yes, due to the nature of the program and the large lender loans, you must have a net worth of at least $8.5 million and have a minimum annual income of $250,000. You must also meet underwriting guidelines in order to obtain the actual insurance policy. 

Q. If the funds are borrowed, don’t they have to be repaid?

A. Yes, the loan is repaid using part of the death benefit. Your cash flow is not interrupted to repay the loan and your family will still receive the desired net amount of insurance benefit.

Q. What about paying interest on the loan?

A. You may be able to roll the interest into the loan, which can then be repaid with the death benefit as well. Again this frees up your cash today. You can also choose to pay a portion of the annual interest out-of-pocket, which decreases the size of the loan and reduces risk.

Q. How long is the term of the loan?

A. Loans for premium finance can be 5, 10 or 15 year terms. The length of the term depends on the age of the borrower, the loan amount needed for the policy and current interest rates.

Q. What are the borrowing rates for the loan?

A. The borrow rates for premium finance are based on the 12 month LIBOR plus a spread. It is also possible to borrow the funds using Japanese Yen.

Q. What is LIBOR?

A. LIBOR stands for London Inter-Bank Offered Rate. This is the interest rate at which banks charge each other for loans. LIBOR is generally applied to large, short-term loans, much like the loans needed for premium financing.

Q. Are the borrowing rates locked in, and if so, for how long?

A. Yes, your rate will be locked in for 12 months. For some qualified clients, it is possible to lock in rates up to 15 years using Yen Financing.

Q. What can I use for collateral on the lender loan?

A. The beauty of premium financing is that the insurance policy and the loan work with each other. While the loan acts as a way to pay for the policy, the cash value of the policy acts as the collateral for the loan. In some circumstances, the cash value may be insufficient and additional outside collateral may be required.

Q. What out-of-pocket costs will I be responsible for paying?

A. Although there may be some out-of-pocket costs when participating in a premium finance program, they are small in comparison to paying annual permanent life insurance premiums. These costs are mainly generated from acquiring the lender loan. In Year 1 you will be required to pay a loan acquisition fee, which ranges from 1%-2% of the loan amount, depending on the lender. The term of your loan will be between five and fifteen years, so a loan renewal fee will be required at the end of each term. The renewal rate is the lesser of 0.25% of the cumulative loan amount or $25,000.

Q. Are there any risks associated with premium financing?

A. Like any financial endeavor, premium financing does have its risks. Interest rates can greatly affect the cumulative loan amount. If interest rates grow too large, the cumulative loan could grow faster than the cash value of the policy, which could result in more outside collateral needed for the loan or a decreased death benefit. 

John M. Plocharczyk, LUTCF is experienced in the implementation of premium financed life insurance strategies. Through a wealth of experience, I have orchestrated premium finance cases with several major life insurance carriers in the marketplace (ING, AIG, Prudential, NY Life and Manulife). Furthermore I have close relationships with the largest banks in the premium finance business including ING/CSFB, HSBC, UBS, Wells Fargo, Mellon Bank and AI Credit 

For more information on premium financing, please feel free to contact my office.