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.

Would you believe such a tool exists?  And, if it did exist, why wouldn’t you use this tool?

Seldom heard of, and seldom used, businesses can create a captive insurance company that will offer all of the benefits described above.

But, what exactly is a captive insurance company? 

A captive insurance company (captive) is a small property and casualty insurance company formed by a business owner(s) to offer insurance for their business and other closely held businesses.  The policies underwritten by the captive aim to supplement or replace existing insurance coverage.

The IRS has set the parameters wherein compliant captive companies can operate. Part of the parameters include IRS guidance, which includes certain advantages where underwriting profits are tax exempt for the captive.

Not only for tax advantages, but because of statutory laws and state jurisdictions that companies operate, make it an ideal time for closely held companies to create a captive.

Below are Four Advantages of Owning a Captive Insurance Company:

1. Insure Hidden Risks:  without realizing it, many businesses owners self-insure a lot of risk.  By owning a captive insurance company: self-insured, un-insured, and under-insured risks can convert to tax-deductive premiums paid to your captive.
2. Reduce Premium Costs: the large premiums payments you pay to your commercial insurer pays for their litigation costs, their marketing costs, their overheads costs, and their profits.  By supplementing your current commercial insurance, or replacing your insurance coverage with your captive you can reduce the total cost of risk.
3. Wealth Accumulation & Asset Protection: captives are one of the best asset protection tools available.  If you have your captive setup/designed appropriately, assets often are credit protected.
4. Own Your Own Financial Institution: owning a captive insurance company allows you to earn tax free profits from underwriting profits which you can use to make loans and make investment with your own capital.

Simply, your captive insurance company will provide better coverage and better service to your operating company and other closely held business than a commercial insurer ever would.

But, having a reputable firm design your captive insurance can serve purposeful, as explained earlier it can afford credit risk protection through proper design.  A company like COX Capital Group, Inc. will work with your legal and tax advisors, and will coordinate all the activities needed to form the captive, and to ensure that the company is compliant with IRS parameters and meets all requirements of a captive.

Despite all of the intricacies of forming a captive, below illustrates the broad strokes of how a captive insurance company can benefit your business(s), while providing you with another profit center.

Because commercial property has slowed, many landlords who cannot sell their properties have accessed the capital in their properties by turning the debt capital markets and refinancing their properties to extract equity instead of finding buyers.

It seems sellers have a price point they value their properties at, and the market to purchase has not caught up to that value.  However, lenders see the value in the properties, because the lending demand in the debt capital markets have increased with banks, insurance companies, hedge funds, and private equity firms interested in investing in commercial real estate loans versus lower-yield bonds, which has given property owners an option to retrieve gains if their properties do not sell.

In an article written on Bloomberg.com, “NYC Landlords That Can’t Find Buyers Turn to Borrowing Instead,” there is a quote made by Scott Rechler, Chief Executive officer of RXR who sums up the state of the commercial real estate market best…”The basic trend is you have a really strong debt market and a sales market that has hit the pause button while it seeks to find price discovery.”

But, who knows how long that discovery will take.  Therefore, landlords who have held their properties for years seem ready to collect on their appreciation.  And, lenders are refinancing existing debt and allowing property owners to cash out to keep the gains for themselves.

Here are five other reasons to consider refinancing your commercial real estate loan:

1. Refinance and cash out to use the money to free up working capital for other business ventures, or to put money down on other commercial real estate investments by taking advantage of the poor sellers’ market, or improve the value of other real estate assets.
2. Refinance and cash out to lock in on historically low rates, before they increase.  By taking advantage of rates now, your mortgage payments could be, at or below, your current mortgage rates while securing the gains on your property.
3. Refinance and cash out to consolidate high-priced debt obligations, that could increase cash flow for your entire enterprise.
4. Refinance and cash out to distribute dividends to investors to keep them interested in investing in future endeavors.
5. Refinance and cash out to put funds into a savings product that simply collects interest and gives you cash-on-hand for future investments when sellers come down on their real estate prices.

These insights are based on an article written on Bloomberg.com.  We encourage you to read the entire article for more outlooks to the commercial real estate market.

Stay up to date on latest insights and commercial real estate trends.   Also, please visit our investment banking page to gain a glimpse of our suite of debt products.

Graphical depiction of the real estate drought in New York City, provided by Bloomberg