PREMIUM FINANCING
Financing of life insurance premiums is a concept that has captured the attention of the senior market in recent years; it is not a new concept, nor is it exclusive to the senior marketplace. The importance and value of this simple concept lies in understanding the basics.

WHAT IS PREMIUM FINANCING?
Premium financing is an arrangement with a third-party lender to pay life insurance premiums. There are many third party lenders available; most programs have certain common features.

  • The insurance policy is collaterally assigned to the lender
  • Additional collateral is sometimes necessary, and may take several forms
    • Letter of Credit (LOC)
    • Marketable securities
    • Personal guarantee
  • Principal and interest of the cumulative loan are paid in various ways, determined by the terms of the lender, and client loan arrangements.

Premium financing is a leveraging technique which allows individuals to purchase significant amounts of life insurance for estate tax liquidity, business succession, or financial planning needs, without the necessity to liquidate assets which are currently positioned to maximize the client’s investment returns.

The principal of using someone else’s money to finance real estate or one’s business is a commonly understood concept. Why the utility of this concept should not be applied to the purchase of another personal asset like life insurance, is a very valid question.

WHY SHOULD ANYONE BE INTERESTED IN SUCH A CONCEPT?
  • Greatly reduced out-of-pocket costs minimize cash flow impact required to purchase life insurance
  • Client maintains control of their capital, allowing continued growth of current assets at higher rates of return
  • Attractive leveraging options occur when a client’s current potential investment rate of return is greater than the cost of borrowing, thus, yielding an attractive profit potential by allowing clients assets to perform undisturbed
  • Future value of a client’s life insurance policy may be greater than the premium and loan interest cost, creating an asset with a positive return on investment
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