What is Premium Insurance Financing?

Insurance premium financing involves taking out a loan to pay for an insurance policy’s.  An insured can finance certain types of insurance such as Life Insurance, Property and Casualty Insurance, and Corporate Owned Life Insurance.  The loan for the premiums are paid in installments that carry a principal amount plus interest, just like with any other loan.  If the insured passes away before the term of the loan, the proceeds are generally paid with the death benefit proceeds.

Why Get a Loan to Pay for Insurance Premiums?

Sometimes insurance premiums can be quite expensive, even for a standard whole life insurance policy.  However, for those who need higher coverage: corporate executives, businesses owners, and high net worth individuals generally have several assets that contain high values.  Because of this, the amount of money to cover these assets can sometimes range be millions of dollars that carry large premiums.

While some could afford the high rate of premiums, some of the assets covered could include assets earning higher rates of returns than the interest rates charged from the premium insurance financing.  Moreover, if there are capital gains taxes charged for liquidating assets to cover the insurance premiums, financing premiums is a good way to avoid those capital gains costs.

What are the Risks?

Of course, there are risks involved in financing insurance premiums:

1)      Policy earnings risk – This could occur in a cash value life insurance policy where the earnings on the cash value of the policy does not outperform the interest rate on the loan.  However, the worst-case scenario is that there is a lower death benefit, because some of the benefit may be needed to pay back a large loan.

2)      Qualification – Since the premiums are being financed, lenders may require the borrower to re-qualify for the policy.  At the time of the re-evaluation of the collateral certain assets may have under-performed or reduced in value.  As a result, the lender could make the entire loan to become due or offer a higher renewal rate, which could negate the purpose of premium insurance financing.

3)      Interest Rate Risk – While interest rates are favorable now for premiums insurance financing, they may increase in the future and at the time of renewal, in which case the cost of the loan may outpace the earnings on the assets being covered.

While these risks may some deterrents in financing premiums, COX Capital will work with your team of CPAs and financial advisors to not only mitigate these risks, but to provide the protection you need for your business and family.