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 will post additional collateral. Should the insured(s) die prior to the repayment of the premium loan, the outstanding loan is repaid from the policy proceeds. In addition, in the estate planning context where the policy will be owned by a trust, it is recommended that an exit strategy be implemented in order to provide funds to repay the loan as well as pay ongoing premiums once the loan is repaid.

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Loan interest is typically tied to an external measure such as 1-month or 12-month LIBOR or Prime lending rate, plus a spread. The loan interest will fluctuate as the underlying benchmark rate fluctuates. For example, if a bank lends funds at 12-month LIBOR + 155 basis points, the loan rate will change on each anniversary tied to the then current LIBOR + 155 basis points. Longer term fixed loan rate programs are available at higher level 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.

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Careful consideration should be made to determine whether premium financing is suitable for a Client. The client, and his or her legal and tax advisor, should determine the client’s risk tolerance and decide whether the concept is an acceptable risk.

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Direct Client Benefits

For individuals considering life insurance policies with sizable annual premiums, Life Insurance Premium Financing may be a convenient option for funding required policy premiums.

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The following are some of the benefits to the policy owner utilizing premium financing:

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• No initial out-of-pocket life insurance premium required to place the coverage; premium is paid from loan proceeds

• With certain life insurance products, limited external collateral is required from the policy owner to gain access to financing

• Policy owner receives all the tax advantages of life insurance, which include:

  • Death benefits are usually income tax free

  • Cash value accumulation may be tax free or tax deferred

  • Cash value can usually be borrowed income tax free

  • Cash value can usually be withdrawn, up to cumulative premiums, income tax free

• Other potential benefits of premium financing include:

  • Maintaining current liquidity and existing investment strategies

  • Minimize capital gains taxes from liquidating assets to pay premiums

• Preserves cash flow for other uses