As an insurance agent for high net worth clientele – or a high net worth individual yourself – you’ve probably heard about premium financing and are aware that it’s a solution where borrowed funds pay for life insurance premiums. But if that is the extent of your premium finance loan understanding, then this article is for you. In addition to describing what premium finance is all about – and why Global Financial Distributors is the company more people trust for their financing needs – this article will pair answers to some of the most frequently asked questions we receive related to premium financing. These questions include how it works to how it can work for you – whether you’re a thriving business owner or a high net worth individual who wants their family to be fully financially insured.
What is premium financing?
As its description implies, premium financing is a loan designed to pay for life insurance premiums. As a high net worth individual, whose assets are at or more than $5 million, you likely need a considerable amount of life insurance protection given your expenses, financial obligations and responsibilities. But if your current earnings are tied up in other affairs related to investments, business processes or day-to-day living, you may not have the funds available to pay the premium for your life insurance policy.
Premium financing allows you, or your client, to leave capital where it is and leverage the proceeds of the loan instead to pay for the cost of the premiums. Such a strategy prevents you or your client from having to liquidate assets.
How does premium financing work?
Much like life insurance policies – meaning the plans themselves – premium financing arrangements are highly customized; the insurance needs of one individual may be different from those of another, even if they’re both in the high net worth category. The relative amount of insurance coverage someone needs ultimately affects the structure of a premium finance arrangement.
All that being said, the bare-bones framework of each is more or less the same. It can be summarized in three steps:
1. A loan is applied for by a trust or business borrower. This loan will be collateralized by the cash surrender value of a life insurance policy.
2. Once the loan is approved, the funds are either transferred to the borrower or the lender wires the funds directly to the life insurance company to pay the life insurance policy premiums.
3. The borrower will typically repay the loan in installments over the length of the loan term (often on a simple interest basis, but some loans may be structured to negatively amortize, which will result in reduction or elimination of immediate loan payments).
That more or less represents the thrust of how a typical premium finance agreement works. At the end of the loan term, if there is a remaining principal on the loan that has yet to be paid off, the accrued cash value of the policy can be used to cover the amount that’s still owed. Alternatively, if you or your client were to pass away and a balance remained, the proceeds from the death benefit can serve as the payment for the amount owed. The premium finance company you select may have other suggestions for how to conveniently cover the cost of the original loan without having to tap other sources of capital. This may also include extending the loan term, which is available to you by going with Global Financial Distributors as your premium financing partner.
What are the other uses for premium financing?
We’ve spoken at length about how the borrowed funds from premium financing allows high net worth individuals to retain full control over how and where your money is used and purchase life insurance at the same time. But the proceeds of premium financing don’t necessarily have to go toward individual life insurance. For example, if you or your client own a business, premium financing funds can establish a buy-sell arrangement. A buy-sell arrangement, or buy-sell agreement, determines how the business will be divided up if one of the partners opts to leave or passes away.
Another use is for key person insurance. If a business has an especially important individual who is truly “key” to the organization’s success, key person insurance provides the funds that can go toward replacing that person should they die unexpectedly or suffer a debilitating injury.
Here are a handful of the other usages for premium financing:
- Estate planning
- Deferred executive compensation
- Employee retention
- Personal retirement planning strategies
Is group life insurance something you’ve been eyeing for your employees as an incentive to stay with the company? Premium financing can make it possible.
Are there any risks associated with premium financing?
There is no such thing as a risk-free borrowing arrangement, premium financing or otherwise. For example if interest rates climb, borrowed funds won’t pay for quite as much were interest rates to hold steady or slip.
But this is another reason why you should choose Global Financial Distributors as your preferred finance company; we’ll help you offset that risk. Whether it’s choosing a fixed-rate loan or variable, Global Financial Distributors’ mission is to ensure the financing arrangement performs in the best way possible for you.
If you’re ready to see what the power of borrowed funds can do, we want to hear from you. Contact Global Financial Distributors today.