Premium Financing

With the advancement in technology, science, economy, changing lifestyle…one has somehow increased the probability of risk in his/her life. Life insurance has become a need of the hour. It protects your family and can also be useful in estate planning, business planning or securing our life after retirement. Most of you don't know that your insurable capacity is equivalent to 3 to 6 times of your net worth on an average but you never look into a policy of this size because you think that you can't pay the hefty premium installments. Even if you wish to buy a new insurance policy, generally, you manage the premium by paying either from your cash reserves or by liquidating your high performing investments. One of the tools, called "Premium Financing" makes your financial planning very easy, which allows you to pay the high premiums on time without hampering the existing investments. But how?



In premium financing, you have the option to borrow the premium from the third party, in order to pay for an insurance policy, which allows you to utilize the premium amount in some other profitable business that you might have otherwise used to pay for the insurance.

The "Premium Finance Company (or say the 'Provider') will lend the premiums to the policy owner in exchange for interest on the loan. The insured (you) then uses this cash to pay your premiums to the insurance company to keep the policy effective. When the period of loan ends, the principal amount along with interest is paid back to the premium finance company and you hold holds the life insurance policy. If in case, the insured person passes away during the policy tenure, the beneficiary collects the death benefits and pays back the outstanding value of loan to premium finance company.

In which situation, this service is helpful?
Premium financing makes sense when you really think you need an insurance but you are not willing to pay the premium amount from your retained assets or by liquidating your high-yielding assets and at the same time, you want to get a lower or no out-of-pocket cost. Do not consider premium financing as a "free" way to obtain life insurance.

It just needs some math to calculate whether you should go for premium financing or not.

1) Calculate the interest rate on the loan, which you are taking for premium financing and also make an idea how much you could earn on the assets, which you would have liquidated otherwise to pay the premium amount. Spot the difference.

2) Compare the bank's loan interest rate with the expected earnings from the life insurance policy.

If, in both the scenario, the interest rate on the loan is lesser, then surely, you should go for premium financing.

Who can buy premium financing?
Well, there are many premium financing companies and each of then have their own set of qualifying parameters, but in general, an individual between the ages of 68 to 85 years with a minimum net worth of $ 1 million and with a bankrupt-remote entity is qualified for premium financing.

Let's count some of its benefits…
Premium financing facilitates you with such a financial plan that enables you to make out a value in borrowing your premium payments, with the premium part to be paid by the provider company and do away with the requirement for a large up-front payment to be made to an insurance company. It indirectly saves your high performing investments consistent and solid, maintains your current cash flow, allows you to attend little out-of-pocket cost, minimize your gift tax concern, plan your estate/business planning and provides you a legacy benefit. You can also attach multiple insurance policies to a single premium finance contract that allows for a single payment plan to cover all insurance coverage.