Premium financing involves the lending of funds to a person or company to cover the cost of an insurance premium. Premium finance loans are provided by banks that specialize in funding third party finance entity known as a premium finance lender; Premium financing is mainly devoted to financing life insurance in large amounts.
To finance a premium, the individual or company requesting insurance must sign a premium finance agreement with the premium finance company. The loan arrangement usually last 5-10 years or to the end of the life of the policy. The premium finance company then pays the insurance premium on behalf of individual or company, usually in annual installments, for the cost of the program. Typically, clients that engage in this transaction are age 29 to 75; with high net worths or yearly income. Younger clients benefit in the current environment due to the advent of premium financed indexed universal life policies.
Advantages of Premium Finance
There are a number of benefits to financing insurance premiums. These include:
- TAX SAVINGS - By paying interest instead of premiums and structuring ownership of the life insurance properly, interest can be deductible for business planning policies
- Eliminates the requirement for a large up-front payment to an insurance company
- LEVERAGE - Most self-made millionaires are comfortable leveraging their assets and have used that to create wealth
- RETAINED CAPITAL - Many high net worth clients earn double-digit returns on their investments, be it in their business, real estate or investments. Premium finance allows those clients to keep their money working for them in those high returning asset classes
- INCREASED IRR - Utilizing premium finance reduces client outlay in the early years thereby increasing long term IRR
- Multiple insurance policies can be attached to a single premium finance contract, allowing for a single payment plan to cover all insurance coverage
- Premium financing is often transparent to the individual or company insured. Brokers transmit the completed premium finance agreement to the premium finance lender, and the policy holder is billed for loan interest as they would be for any other typical insurance policy
- Allows for clients to obtain needed coverage without liquidating other assets
- The main benefit in premium financing is avoiding high cost in paying premiums out of pocket. By using other people's money (leveraging a lender's capital), clients can retain a significant amount of capital
- Typical client profile: Age 29 to 75; Business-owner, entrepreneur, professional; Desire to retain capital while maximizing wealth transfer & potential tax-free retirement income
- Properly structured premium financed Index Universal Life may provide tax advantaged income