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Using a lender to finance your insurance premiums? Here’s what you need to know

November 29, 2022 / 3 min read

Over the past decade, low interest rates supported a consideration of a premium financing strategy, offering high-net-worth individuals a low-cost way to get life insurance. But as financial conditions change, so does the risk. Is this strategy right for you?

Life insurance premium financing is a strategy that allows policy owners to borrow funds from a third-party lender to pay life insurance premiums. It can be a helpful strategy for high-net-worth individuals who need large amounts of life insurance but don’t have the cash on hand to pay the premiums or would rather keep their money invested in other areas, relying on a cheaper borrowing rate instead. It has evolved into a segment of the industry that tries to capitalize on low borrowing rates to get life insurance for little to no out-of-pocket cost.

How does premium financing work?

A lender makes the premium payments on a life insurance policy with the promise that the policy owner will repay that amount plus interest at some future point. Additionally, the policy owner is required to post collateral if the policy cash value isn’t high enough to cover the full repayment to the lender. If the insured passes away before the loan is repaid, a portion of the death benefit is used to repay the lender and the remaining amount is paid to the beneficiaries.

Who’s it for?

Premium financing is often best suited to high-net-worth individuals (typically $20 million and more of assets) who have a need for permanent insurance but are low on cash or liquid assets because their capital is used in places that earn more than the current borrowing rate.

Why use premium financing?

What are the risks?

Depending on plan design, there could be many risks, the severity of which are lessened or amplified based on the assumptions used at time of purchase.

Premium financing can still be a viable planning option for the right reasons and in the right situation. But with the low cost borrowing rates of the last decade coming to an end, and uncertain financial conditions ahead, careful planning is necessary to ensure the strategy is right for you.

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