What if you need lot of life insurance coverage, but only have a little cash? Insurance-premium financing might be the answer.
This option is usually geared toward high net-worth families or business owners with illiquid assets. The best candidates are age 50 and under because insurance premiums increase with age. Financing firms only consider loans for insurance with face values of at least $1 million, but multiple policies can be financed under a single loan. Before you jump in, consider the following pros and cons of insurance premium financing. (Find out how much life insurance you need; read How Much Life Insurance Should You Carry?)
- Your family or business is covered in case something happens to you.
- You are only financing the premium, not the face amount of the policy, but there is no need to sell other assets to pay a lump sum premium down payment.
- Financing is provided for permanent life insurance policies. The cash value that accumulates over time can be used to pay back the loan, continue to pay the premium or for any other need such as retirement funding.
- Various options allow either short- or long-term financing to meet the needs of the policy owner.
- Yes, there is credit available to finance life insurance. As wealthy families find themselves cash strapped, the demand for credit increases. Finance companies are more stringent with loan approvals, but some still only require a letter of credit.
- Insurance companies partner with financing organizations that specialize in premium financing to meet the specific needs of their clients. Financial advisors may help evaluate and recommend the right creditor for your situation.
- You pay interest, which is volatile. Interest-only loans may result in a higher loan bill as the interest rates are tied to indexes. If the rate jumps, you may be required to pay a large amount out of pocket.
- If you miss loan payments, your insurance coverage may lapse.
- It's a loan, and loans have fees. Finance companies usually price for the worst case scenario. Compare multiple options and negotiate to reduce costs, but you will pay for the opportunity to spend money you don't currently have.
- Insurance policies don't always perform as initially illustrated. The cash produced by the policy may end up being less than the amount of the loan.
- Insurance is only as good as the credit rating of the insurer. Finance companies may discontinue paying premiums to insurance companies with unstable financial situations.
- Some financiers require actual collateral. Some contracts include the value of the policy in as collateral. If the value of the collateralized assets declines, policy owners may be required to post additional collateral to maintain the loan and keep the insurance policy in force.
Plan for Premium Financing
Premium financing is big business, as evidenced by the recent sale of American Insurance Group's (AIG) premium financing organizations for $679.5 million to First Insurance Funding Corporation. Though these organizations are impacted by changes in the insurance and credit industries, they still offer valuable services to cash strapped clients.
Insurance premium financing may be an integral part of estate planning or business succession planning. There are multiple factors that determine if it is the right solution for a given situation. Consult experts with experience in the premium financing business for guidance.