For the right person, premium financing can be a powerful strategy.
Premium finance is a strategy in which a policyholder borrows from a third-party lender (a bank) in order to pay large life insurance premiums on a large policy. This strategy allows the borrowing policyholder to purchase large amounts of life insurance, and in turn accumulate large amounts of cash value within that policy, while not tying up much of their own money in the process.
When designed properly, the leverage created from a premium finance play allows a policyholder to acquire a large amount of life insurance for a small fraction of the outlay that it would normally require from their own pocket. This can allow them to keep their money working in other places, and also can allow cash value to build within the life insurance policy in the meantime.
The basic idea is that as long as the cash value in the life insurance plan is growing at a greater rate than the very low interest rate on the loan with the bank, the policy itself can eventually pay off the loan. This leaves the policyholder with a substantial amount of cash value, as well as a paid-up life insurance policy that they essentially got for free by leveraging their borrowing power.
An ideal premium financing prospect is in average to good health, with excellent credit and a high net worth of at least $5 million. Both health and financial underwriting will play a large role in the process, and candidates will be required to prove that they are in good shape in both aspects.
The health requirements aren’t flexible – if a candidate cannot qualify for life insurance coverage due to poor health, premium financing won’t be an available strategy for them. However, there is a bit of wiggle room on the financial side of underwriting, in certain scenarios. If there is a significant amount of annual income, a lower net worth may be overlooked. Certain estate planning or business planning scenarios can also create exceptions if the underlying individuals don’t have the required levels of net worth.
While premium financing a life insurance policy can be a powerful strategy, it is not without its risks, and therefore is not for everyone. It requires expert guidance and careful planning to be executed properly, minimizing the risks.
It’s important to choose a premium finance insurance company that has experience in this area. If you’re interested in exploring whether premium finance is something you should consider, reach out to Alliance Group and we can connect you with an expert who can help with your plan.