Life Insurance Financing

What is premium financing in life insurance?

Life insurance policies are often quite expensive, especially for high-net-worth individuals with complex finances. As a result, monthly premiums can tie up income and may even adversely impact one’s lifestyle, which is why some people leverage life insurance premium financing — the process of taking out a loan from a third-party to cover policy payments.

What are the benefits of premium financing?

Premium financing enables you to receive your desired policy without jeopardizing your current income or triggering consequential capital gains taxes. For instance, if your wealth is associated with relatively illiquid assets like real estate, premium financing would allow you to avoid the tax implications of selling your holdings prematurely just to pay premiums. Moreover, your higher-yield investments — which are kept intact rather than liquidated — may even generate higher returns relative to your borrowing rate.

What are the risks of premium financing?

Premium financing borrowers are still subject to risks, such as:

• Interest rate risk: In the event interest rates rise and outpace policy returns, the cash value of your policy may fall short of your loan balance, which can hinder your estate plans.
• Qualification risk: During policy renewals, it’s standard to reevaluate loan collateral. Should the value of your collateral decline and fail to meet lending thresholds, you may have to provide additional collateral to cover the shortfall.