Premium Financing

Simply put, “Premium Financing” refers to the financing of premiums for a life insurance policy.  This can be an extremely beneficial way for a senior to preserve their liquidity and be able to establish estate protection. 

Premium Financing has been around for decades; however, with the recent emergence of the “Secondary Market for Life Insurance” (more commonly known as the “Life Settlement Market”), premium financing has become an even more attractive alternative for seniors.  The Life Settlement Market has created a whole new asset class with life insurance policies, and as a result, lenders are willing to provide aggressive financing products with very minimal collateral positions or cost for the insured and/or policy owner.

Premium Financing programs can be as short as 2 years and as long as the remaining lifetime of an insured.  At the end of the financing term, policy owners typically have the following 2 choices:

  1. Re-pay the loan and begin paying premiums on the policy
  2. Sell the life insurance policy in the Life Settlement Market (see “Life Settlements” for more detail)

*An example is provided below to help you better understand how this could work:

A 75 year old man obtains a life insurance policy through a premium financing program with the following terms:

Policy Face Value:
$5,000,000
Annual Premiums:
$250,000
Annual Interest Rate:
8.00%
Loan Term:
2 years
Collateral Requirement:
25% personal guarantee of the loan amount

The loan amount after 2 years totals $561,600.  At this point, he has the following options:

  1. Repay the loan and keep the policy at which point he would need to begin making the premium payments.
  2. Sell the policy in the Life Settlement Market.  If, for instance, he were to get an offer of $1,000,000 for the policy from a Life Settlement Investor, the owner would then keep the difference of $438,400.
Although unlikely, should the insured die within the first 2 years, the loan would be paid off, in addition to some administrative costs, and the remaining death benefit would go to the policy beneficiaries.  If in this example, the insured died after the first year at which point the loan totaled $270,000, the beneficiaries would receive $4,730,000.

*The above example is intended to provide you with a general overview of how such a transaction might work and is in no way a guarantee of such results.  However, a similar situation could very well be likely for a qualified senior.