Premium financing is a strategy in which an individual or business borrows funds from a lender to pay the premiums of a large life insurance policy, rather than paying the premiums out-of-pocket.

Premium financing allows high-net-worth individuals to purchase substantial life insurance policies without liquidating assets. This helps in estate planning, wealth transfer, and maintaining liquidity for other investments or business opportunities.

While premium financing can be used with various policies, it’s most commonly associated with universal life policies because of their flexibility and potential cash value accumulation.

Risks include fluctuating interest rates affecting the loan cost, the insurance policy underperforming which may require additional collateral, and potential changes in tax laws that might alter the benefits of the strategy.

The loan can be repaid from the policy’s cash value, other assets, or from the death benefit upon the insured’s passing.

Yes, if the policy’s performance doesn’t meet projections or if interest rates rise substantially, the client might need to post additional collateral or pay out-of-pocket to cover interest or principal balances.

If interest rates rise, the cost of borrowing increases. If the rates rise substantially, it might negate the benefits of the premium financing strategy.

Interest on the loan might be deductible, but this can vary. Also, if not structured correctly, the death benefit could be counted as part of the taxable estate. Gift taxes may apply if premiums are paid on behalf of another.

Not necessarily. Some clients use premium financing temporarily, such as until other assets become liquid or a business transaction completes. The strategy can be as flexible as the client’s financial situation requires.

By staying educated on the latest industry trends, tax implications, and by conducting regular reviews of the strategy’s performance. Collaboration with other financial professionals is also key.

Yes. The insured’s age and health can impact the insurance premiums and, subsequently, the amount needed to finance. It’s typically a strategy used by older, high-net-worth individuals who might face higher insurance premiums due to age or health.

Yes, but there might be financial consequences depending on the loan terms, policy surrender charges, and market conditions.

Typically, the death benefit is used first to repay the outstanding loan, with the remainder going to the beneficiaries.

In traditional life insurance purchase, premiums are paid out-of-pocket. With premium financing, these premiums are borrowed, allowing the client to keep their capital for other uses.

Not all. It’s essential to work with a lender familiar with the nuances of premium financing. Some banks specialize in these types of loans.