Benefits of Life Insurance Premium Financing

Benefits of Life Insurance Premium Financing

Life insurance  premium financing involves taking out a third-party  loan to cover a policy's premiums. Much like other loans, the lender charges interest , and the borrower (the insured, in this case) repays the loan in regular installments before the debt is satisfied or the insured passes away, where case the total amount is usually paid down with insurance proceeds.

This strategy might be useful to high net worth individuals (HNWIs) who don't desire to liquidate assets to cover costly life insurance premiums outright. But could be the practice too risky?

KEY TAKEAWAYS

  • The bigger the quantity of your life insurance policy , the more pricey the premiums on it. 
  • Three regions of risk for insurance premium financing are qualification risk, interest rate risk, and policy earnings risk.
  • One concern could be that the money value of the policy might not increase as fast while the interest rate.

Why Go For Insurance Premium Financing?

First, let's look at why people would even consider insurance premium financing. Nearly 55% of Americans have a life insurance policy to be sure their family members could be financially secure if the insured passed away.1 Premiums vary greatly according to policy type, your actual age, your quality of life (and health habits) and, needless to say, how big the policy.

Taking out your own loan to cover high insurance premiums may include fewer risks than using insurance premium financing.

A 47-year-old nonsmoking man, for instance, could easily get a 20-year $100,000 term life   policy for approximately $19 monthly; the premium would go around about $34 monthly for a $250,000 policy.2 

HNWIs, however, are usually searching for coverage in the millions or tens of countless dollars to handle business , inheritance, and tax issues. A $25 million 20-year term life policy for exactly the same person might run about $2,100 per month, and—here's where it will get really expensive—a whole life   policy would start nearer to $15,000 a month.3

Because premiums can quickly cost upward of $100,000 or even more per year, premium financing will make sense as it allows visitors to borrow at a rate near to a benchmark short-term rate while keeping the amount of money they'd have spent in investments that yield a higher ROI. Premium financing may also stop the insured from triggering capital gains taxes had they liquidated assets to let them purchase the premium upfront.

The Risks

Even though the strategy is suitable for a lot of people, it will pose certain risks that should be thought about before generally making any decisions. These risks include (but aren't limited to):

Interest Rate Risk.

Interest rates are low now, but when they rise it may spell trouble. “The majority of the time reasonably limited finance loan can have a variable interest rate ,” says James Holtzman, an avowed financial planner at Legend Financial Advisors.4 “At this time that is a great thing. Nevertheless when [interest rates] rise, it may really eat to the advantages you're attempting to accomplish in the initial place.”

Qualification Risk

Lenders typically require borrowers to re-qualify every time the loan is renewed, of which time the loan's collateral is re-evaluated (collateral might include real-estate, stocks, and other assets and investments). If the worth of the collateral has fallen below a particular threshold, the insured might have to provide additional collateral from the loan.

Otherwise, the loan could become due or offered for renewal at a greater rate. Because the loan is renewed at the conclusion of every term before the insured passes away, qualification risk is obviously present, whether it's linked to collateral value or several other factor beneath the lender's underwriting standards. 

Policy Earnings Risk 

If the policy's cash surrender value underperforms, the loan balance could exceed the worth of the collateral, where case the insured would be required to provide more collateral in order to avoid default.

Likewise, if the death benefit fails to develop, the policy could provide less coverage than expected once the loan is finally satisfied. In the worst cases, the insured's estate will have to repay the loan if the death benefit could not.