Should I Use a LIBOR or PRIME Based Loan for Life Insurance Premium Financing?

You’ve made the decision to purchase life insurance as a part of your estate plan, and you’ve made the decision to use bank financing to pay the premiums. But, do you want a LIBOR or PRIME based loan?

There are 4 different LIBOR rates (1-month, 3-month, 6-month, and 12-month). Most life insurance premium finance LIBOR based loans utilize the 1-month or 12-month rate. The selected rate determines how frequently the rate is adjusted. If your premium finance loan is based on 1-month LIBOR your borrowing rate will adjust every 30-days. Some individuals may have some concern with the variability of a loan adjusting so frequently, but the following table illustrates it is often a less costly alternative to the 12-month LIBOR rate.

A PRIME based premium finance loan is simply based on the PRIME rate. When you enter into the loan the rate is typically locked for a 1-year period, and is adjusted on the anniversary of the loan to correspond with the current PRIME rate.

Whether you have a LIBOR or PRIME based loan there will always be a markup of 125 – 300 basis points or 1.25% – 3.00% in addition to what the underlying rate is at. Most life insurance premium finance loans have a floor of anywhere from 2.00% – 5.50%. The following chart represents a 10-year historical look at 1-month, 3-month, 6-month, and 12-month LIBOR rates and PRIME rate. In order to chart this we took the average monthly rate for the year. The data is from January 2000 through May 2010.

In most cases you will required to post additional collateral to secure the loan. There are also a number of ways to treat the interest payment on the loan. Some people choose to defer the interest, while others elect to pay interest. To obtain additional information on life insurance premium financing please visit our prior post.

Buying life insurance is important for those individuals who financially support dependents or other family members. It is also a critical asset to provide necessary liquidity for estate planning purposes. It is important to determine what your life insurance needs are, choose what type of policy will fulfill that need, and determine which life insurance carrier suits your unique situation. Click here to see how can assist you in this process.

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