Benefits and Risks of Life Insurance Premium Finance

Life Insurance Premium finance is the safer way of purchasing life insurance, especially for high net worth individuals. It allows a company to borrow the cost of life insurance premiums. It usually occurs when the company has a very high premium that makes it necessary to borrow the amount in part or in whole to prevent reducing the company’s liquidity.

More often than not, traditional lenders don’t provide premium financing, and business owners need to look for specific premium financing providers to secure the loan.

Benefits of Premium Finance

When a company releases a large amount of payment, its owner must first consider whether the funds are needed for the daily operation of the company or for the expansion of the business. And in order to prevent liquidating some of the company’s assets or using key funds, financing is required.

More often than not, businesses depend on some type of loan to be sustainable. Premium financing is often a part of the debt cycle for company with high corporate owned life insurance costs.

A business owner can finance multiple policies via a single agreement that allows the owner to make a single insurance premium payment a month. In most cases, insurance companies accept premium financing and accept payment straight from the finance provider. When that is the case, the premium finance company will bill the business owner instead of the insurer.

Premium Financing of Non-Qualified Executive Bonus Plans

Premium financing can be used on non-qualified executive bonus plans, which are available for vital employees of any type of corporation. The employer has the discretion to select the workers to cover and the amount of the bonus. The business owner pays for the premiums on the policy, and the employee has to pay tax that’s equal to the premium amount.

Financing of 770 Accounts

A 770 account is a permanent life insurance policy that has been structured to maximize its cash value. By maximizing the total death benefit and cash value, you can maximize the cash value of the life insurance policy. More often than not, the cash value is tax-free and can be accessed at anytime.

770 accounts have a very competitive rate of return and can be used as collateral. But the premiums can be high. High net individuals or business owners can resort to financing in order to keep up with the premium payments without the need to liquefy assets.

As you can see, financing life insurance premiums can help individuals and companies that need to pay large amounts of premium. It allows them to stay liquid while providing insurance coverage to oneself or one’s employees. This is ideal for corporate owned life insurance programs as well as private banked owned life insurance policies.

Understanding Life Insurance Premium Financing

Life insurance premium financing is a complex concept of life insurance formed to let affluent people acquire enormous amounts of policy while settling some of the costs of the policy at the same time. Premium financing will be possible if there will be collaboration of at least two financial institutions. The policy holder must be old enough for the premium financing agreement to be fit for this sort of arrangement. This arrangement usually requires that the individual should be older than age 70 but younger than age 84. In addition, the insured should be in good health to get a life insurance and must also have a net worth of at least $5 million.

The Loan

Premium financing entails pulling out a loan to obtain life insurance. These sorts of loans can be considered as special loans with small interest rates that are merely obtainable through premium financing. They can also be a non-recourse loans that are protected by the insurance policy itself. When we say non-recourse loan, it means that the loan is secured by the death benefit of the insurance policy. Even if the policy holder fails to make payments for the loan, the bank is assured to get its money back.

The Life Insurance Policy

An insurance policy is an element of a premium financing arrangement. The insurance policy acquired is typically utilized as a component of a charitable gift but can be employed for variety of purposes. The cash values of the policy are generally not accessible on hand to the policy holder since it is secured by the premium finance loan.

Advantages

The primary advantage of engaging in premium finance arrangement is that a wealthy individual can hand down millions of dollars to its beneficiaries while reducing the cost incurred from the premiums. On the contrary, the loan payments can be obtained from the interest of the present investments. Given that payments do not depend mainly on age or health and the loan is guarded by the insurance policy, the bank is able to charge minimal interest rates to make it become more affordable than premium payments would cost.

Other Concerns
When acquiring a premium financed life insurance policy you need to consider the fact that you are getting a loan to obtain an insurance policy. Always remember that even if you are not making premium payments, you should still make loan payments. Therefore, it is necessary that you can afford to pay your loans from the bank. Moreover, banks usually offer these types of loans to people with high net worth because they have the needed assets that are required to substantiate such large amount of loans and have collateral to protect the interest of the bank.

Condo, Coop and HOA Master Insurance Premium

I’m sure that a lot of condo/coop & HOA board members have the following question: how come on my Automobile & HO-6 Insurance policies I pay the premiums directly to the insurance carrier, and I have the option of monthly installments, whereas on the condo/coop or HOA master insurance policy I have to pay the premiums to my agent or broker, and the premium has to be paid in full upon binding of the policy and if I can’t afford to pay it in full then we have to get premium financing? That’s a very good question, and it all comes down to 2 main ways that insurance premiums are being charged:

  1. Direct Bill
  2. Agency Bill

Direct Bill

Most personal lines insurance policies, including personal automobile insurance, homeowners insurance, renter’s insurance and personal umbrella insurance are direct bill. This means that the insurance carrier is billing the policy holder directly. Most personal lines insurance policies come with the option of quarterly or monthly installments, you’ll have to pay a down payment (usually 20%) upon binding, and the rest will be split up to quarterly or monthly installments. In most cases you’ll be charged a small fee for every installment anywhere from $1 to $6 depending if you set up automatic withdrawals from your bank account. Once the policy is in effect, the agent or broker has nothing to do with the billing of your insurance policy (of course he’ll get a notice of cancellation if you don’t pay your premium and call you up to make sure that you’ll make a payment so your policy shouldn’t cancel). This is why on all your personal insurance policies you pay the insurance company directly and you have the options of installments.

Agency Bill

But when it comes to your condo/coop or HOA’s master insurance policy it’s a whole different story. Most condo/coop or HOA policies are agency billed, this means that the insurance carrier is billing the insurance broker the full policy premium, and the broker has to bill the condo/coop or HOA association. The broker usually has 30 to 90 days to pay the full premium to the insurance carrier. This is the reason why you pay the insurance premiums to the insurance agent or broker and why it has to be paid in full. But what if your condo/coop or HOA association can’t afford to pay the whole premium at once?

Premium Financing

Most condo/coop or HOA associations don’t have extra money lying around, so when your policy premium is more than $20,000 it’s kind of hard to pay the full amount up front, that’s when premium financing comes in to play. Your insurance broker should help you out with the premium financing; there are a lot of good financing companies out there. The interest rates are usually between 6 & 10%. They will only finance about 80% of the premium, which means that you’ll have to pay about 20% upon closing. How does the whole financing process work? The financing company sends a check of the full premium (minus your 20% down payment) to the insurance broker. Then the insurance broker sends to the insurance company the down payment that he got from the condo/coop or HOA and the check that he got from the financing company (minus his commissions). Then the financing company is going to bill you monthly or quarterly with a 6 to 10% interest rate. The following is something that unfortunately happens quite often: The insured made sure to have the policy paid up in full, whether by paying the full amount or by getting premium financing, and after a few weeks they get a notice of cancellation in the mail. What happened here? Very simple, your broker received the full amount, now he has up to 60 days to pay the company, and very often brokers neglect or on purposely delay paying the insurance company right away. This is wrong and illegal and you should stay away from such insurance brokers.