Protection
Premium Financing for Life Insurance
Premium financing is a strategy designed to help clients acquire life insurance for which they have an established need by borrowing the funds necessary to pay the premiums from a commercial lender. The policy is pledged as collateral for the loan; to the extent that policy cash surrender values are insufficient to secure the loan, the client posts additional collateral. Should the insured(s) die prior to repayment of the premium loan, the outstanding loan is repaid from the policy proceeds.
How the Loan Works
In the estate planning context, where the policy will be owned by a trust, it is recommended that an exit strategy be implemented to provide funds to repay the loan as well as pay ongoing premiums once the loan is repaid.
Loan interest is typically tied to an external measure such as 1-month or 12-month SOFR/LIBOR or the Prime lending rate, plus a spread, and will fluctuate as the underlying benchmark rate changes. Longer-term fixed loan rate programs are available at higher borrowing rates, as is the ability to purchase a cap to place an interest rate ceiling for a fixed duration. Loan interest is typically paid annually in cash, although alternative designs such as accruing interest or a combination may be available.
Careful consideration should be made to determine whether premium financing is suitable for a client. The client, and his or her legal and tax advisors, should determine the client’s risk tolerance and decide whether the concept is an acceptable risk.
Direct Client Benefits
For individuals considering life insurance policies with sizable annual premiums, premium financing may be a convenient option for funding required policy premiums.
- No initial out-of-pocket life insurance premium required to place coverage; premium is paid from loan proceeds
- With certain products, limited external collateral is required from the policy owner to gain access to financing
- Preserves cash flow for other uses and maintains current liquidity and existing investment strategies
- May minimize capital gains taxes from liquidating assets to pay premiums
- Preserves the tax advantages of life insurance: death benefits are typically income-tax free; cash value accumulation may be tax-deferred or tax-free; cash value can generally be borrowed income-tax free; and withdrawals up to cumulative premiums are generally income-tax free