A Life Insurance Funding Strategy
Premium Financing
Premium financing is simply borrowing funds from a bank or lending institution to pay for a life insurance policy. It is intended for high net-worth clients who have a large life insurance need but are reluctant to allocate current assets or cash flow to pay the life insurance premiums.
Advantages of Premium Financing
When structured properly, it can provide qualified clients with an alternative funding source to satisfy the life insurance requirement without having to make any major changes to their finances. In certain situations, where a client has significant assets tied up in their business or other long-term investments, premium financing may be an attractive solution. .
- Maximizes the life insurance protection that can be purchased
- Potentially reduces the overall cost of the life insurance
- Frees up capital/cash flow for use on future investment opportunities
Life Insurance
Life insurance is more than just a financial tool to protect your loved ones against the unexpected. It is also an effective asset class for building and transferring wealth.
Premium financing gives wealthy clients the flexibility to leverage their credit in order to accomplish their long-term financial goals.
The Risks with Premium Financing
There are several risks that need to be considered carefully before implementing a premium financing plan.
The most obvious one being interest rate risk. Others include performance risk, collateral risk, and lender or credit risk. All these risks must be factored into the premium financed design. Also, during the initial planning phase, an appropriate exit strategy should be developed.
Having an Exit Strategy is vital. A well planned exit strategy sets aside certain assets to repay the loan balance in the event the premium financing arrangement is no longer viable..
