Perfect Premium Finance
WHAT IS LIFE INSURANCE PREMIUM FINANCING?
When an individual wishes to take out a new life insurance policy they may have the option to borrow cash in order to pay the life insurance premiums known commonly as premium financing. The premium finance company (also known as the 'provider') will lend the premiums to the policy owner in exchange for interest on the loan. The insured then uses the cash to pay the insurance company to keep the policy inforce. When the loan period ends or the insured passes away, the principal amount plus interest is paid back to the premium finance company and the owner retains the life insurance policy or collects the death benefit to be paid to the policy beneficiary less the outstanding loan value.
HOW DOES PREMIUM FINANCING WORK?
Should an individual wish to finance their life insurance policy premiums they will apply to various premium finance companies for a loan to pay the life insurance premiums on the new or existing policy from an insurance company who has approved the premium finance program. Upon securing loan approval from the premium finance company, the life insurance policy is issued into an irrevocable life insurance trust, or ILIT. The borrower will name beneficiaries of the trust which may include a spouse, children, other natural heirs, business partners or a charity. Most commonly the borrower, will have to post collateral for the loan in the form of the policy itself (through a collateral assignment) and possibly additional collateral for a percentage of the loan amount (on average 25%) in the form of a letter of credit, personal guarantee, marketable securities or cash.
Upon securing the required collateral the initial loan amount is dispersed to the ILIT which in turn pays the first premium on the life insurance policy. As future premium payments to the insurance company are required, the premium finance company continues to disperse funds according to the premium schedule.
When the loan matures the policy owner may have a number of choices including the continuing to finance the premiums, repaying the loan plus interest and keeping the life insurance policy or selling the policy in the secondary market for life insurance (also known as a Life Settlement).
Should the insured pass away during the financing period the ILIT will claim the death benefit and disperse the proceeds less the outstanding loan value to the beneficiary.