Life Insurance Premium Financing

Life insurance premium financing allows a policy owner to borrow money from a bank to pay for life insurance premiums. Life insurance premium financing is a great way for a high net worth individual to pay premiums on a life insurance policy.

As with any type of planning there are pros and cons to entering into a life insurance premium finance arrangement. Most insurance advisors attempt to use premium financing as a way to sell a life insurance policy. In my opinion, this approach is completely backwards.

The first step should always be identifying how much coverage is needed. Once the need has been determined then, and only then, should the discussion begin on how best to fund the life insurance premium. Life insurance premium financing should be one of several options when determining how to pay life insurance premiums. For purposes of this blog entry we will only address the premium finance option.

Life insurance premium financing arrangements should only be entered into on individuals with a net worth in excess of $10 million, who have an annual premium of $100,000 per year or more, and a policy death benefit is at least $5 million. Most insurance advisors will disagree with this, but the risks can be too great for an individual who does not meet these minimum requirements.

Entering into a life insurance premium financing arrangement requires obtaining a bank loan. In exchange for the loan, the client will be required to pledge collateral. If the life insurance policy is designed to have cash surrender value then the collateral requirement will be offset by the amount of cash in the policy.

For instance, if the premium borrowed is $1 million and the cash surrender value is $600,000 then the collateral shortfall is $400,000. In this example the amount required to secure the premium finance loan would be $400,000.

When a shortfall of collateral is present (which there typically always is) the lending institution will require the borrower to either put the assets on deposit with them or pledge outside assets as collateral. In most cases, the provider of the premium finance loan will require the borrower to place the assets on deposit with the bank providing the premium finance loan.

Life insurance premium financing loans are usually based on LIBOR or Prime plus 125 to 350 basis points. Most banks making premium finance loans have a minimum borrowing rate requirement (or floor). Depending on the lending institution the floor can range from two percent to five percent.

In our experience there are very few banks interested in life insurance premium finance lending. In certain cases we have been able to utilize a client’s existing bank, but typically we must go through the required due diligence with them to make sure they are comfortable with the lending relationship.

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