Is Life Insurance Premium Financing Right for You?
Asset building can be extremely complicated when looking to increase holdings without dipping into your base principal. Borrowing money to finance your acquisitions is often the easiest way.
Such financing is extremely popular in the stock market in the form of margin accounts. The broker will, in effect, establish a line of credit for a trader to buy stocks so they do not have to use cash to make the purchase.
This same concept of financing an asset purchase is gaining popularity in the life insurance marketplace with the growing practice of premium financing. Essentially, a policyholder enters into an agreement with a lender to pay an insurance premium on his/her behalf. And, as in any loan situation, the policyholder agrees to repay the lender for the cost of the premium, along with interest and fees.
Why would you consider premium financing? It is a technique that allows assets to remain invested that would otherwise be liquidated to pay premiums.
Essentially it allows your money to "work" instead of remaining tied up.
The policy is financed by using its cash value and death benefit as collateral for the loan.
If the policy is surrendered, the loan principal is repaid from the cash surrender value. If the policyholder dies, the loan principal is repaid from the death benefit.
There are, however, some important issues to consider before entering into a financing arrangement.
These programs are designed for individuals with large life insurance needs and solid investment portfolios, i.e. good credit risks. Usually, they purchase for reasons such as maintaining liquidity within their estate, transferring wealth or to establish business continuity.
You should evaluate why you would want to finance your premiums rather than pay them yourself. Financing should be used as a strategy to help achieve your estate planning objectives of amassing and preserving assets.
Life insurance plays an important role in achieving these objectives, but it requires a significant financial outlay. While paying premiums can be viewed as a transfer of assets rather than an expense, utilizing current assets to pay premiums leaves that money dormant for the life of the policy.
With premium financing, a policyholder can take capital that would have been used to pay premiums and invest outside the policy in other high-yield assets.
The third issue to consider is the lender and their contract terms. Purchasing a cash-value life insurance policy is a long-term investment; therefore it is important to pick a lender with proven longevity in the premium finance field.
You want to be sure they will be around for the life of the policy. It is equally important that the lender be a specialist in premium loans. If premium financing is a sideline business, you will probably not be offered the most attractive rates or terms.
To that end, you want to be sure the lender is offering a loan with competitive terms and flexibility, which we can help you with.
You may want to consider a loan that matures upon the death of the insured as opposed to one with a stated call maturity. Call maturities open up the possibility of having to pay a loan off immediately and not over time, which is obviously more advantageous.
Finally, it's wisest to choose a loan with a fixed spread so that payments don't change over the life of the loan. You do not want to find yourself a victim of the instability of interest rates.