The average American can get a basic life insurance policy for an inexpensive monthly premium. But high-net-worth individuals insuring expansive estates will likely have to pay thousands of dollars per month to maintain their policy. Over half of all Americans have life insurance. Though a specific segment of the population qualifies for premium finance for life insurance. Premium finance life insurance borrows money to pay for life insurance premiums on large policies, freeing up capital. Policyholders can then invest their money to make substantial returns and repay the loan with a portion of the proceeds. Here’s how it works.
A financial advisor can walk you through the risks and advantages of premium financing for your investments.
What Is Premium Finance for Life Insurance?
Premium financing for life insurance means a policyholder borrows money to pay for life insurance premiums. Policyholders opt for premium financing when their monthly payments are exceptionally high.
Although borrowing money means paying back the loan with interest, policyholders do so because they use the money that would have gone to premiums for investment opportunities. They anticipate a return on investment that outpaces the interest rate of their premium financing loan, allowing them to make more money than if they had paid their premiums directly.
Premium Finance for Life Insurance Example
The average life insurance policy in the United States costs between $40 and $55 monthly, and payouts range from $250,000 to $1,000,000. These figures represent coverage for a typical working family.
On the other hand, high-net-worth individuals usually purchase life insurance policies with a payout in the tens of millions. Moreover, monthly premiums for such policies cost $10,000 or more, meaning premium expenditures alone are over $100,000 annually.
Instead of sinking that money into life insurance premiums, a high-net-worth individual might decide they can make better use of the money in investment or business opportunities. In addition, if they had to sell assets to pay for life insurance premiums, they would pay capital gains taxes on the money, introducing further financial losses.
How to Qualify for Premium Financing
If you’re looking for premium financing for life insurance premiums, you’ll have to fit these standards lenders use:
- You’re a high-net-worth individual, meaning you have $1 million or more in liquid assets, such as cash, stocks, and bonds.
- You’re younger than 70 and in good health.
- Your life insurance premiums are significant.
- You can provide collateral other than your insurance policy.
- You’ve consulted with a financial advisor or legal professional regarding the viability of premium financing.
- You demonstrate the ability to repay the loan by means other than your life insurance death benefit.
Risks of Premium Financing
Although wealthy individuals must show their capacity to repay the premium financing loan, they still incur risk by taking on this debt, such as:
Rising Interest Rates
Premium financing loans usually have variable interest rates, which rise and fall according to market dynamics. As a result, taking out a loan with an initially low interest rate might become unaffordable if the interest spikes. In addition, increasing interest rates can outweigh the gains made by investing your money.
Financial Sustainability
Premium financing loans generally last three to five years. As a result, a policyholder will attempt to renew their loan so they can continue investing their money in more profitable endeavors.
However, the lender assesses the policyholder’s financial status and collateral at the time of each renewal. If the lender determines the policyholder’s ability to pay back the loan is insufficient, they will increase the interest rate or not offer the loan at all.
Insufficient Policy Performance
Life insurance accounts grow through interest and investment returns. That said, life insurance policies can fail to grow at the projected rate in any given year. If earnings fall short, a policyholder’s collateral decreases in value, meaning they might have to provide their lender with extra collateral to keep from defaulting on their loan.
Similarly, let’s say the policyholder dies, but their death benefit was insufficient to repay the premium finance loan. In this instance, the policyholder’s other assets would have to be used to repay the remainder due.
Bottom line
Premium finance for life insurance helps high-net-worth individuals leverage their money optimally by removing the financial burden of life insurance premiums in exchange for loan payments. Policyholders benefit from the arrangement by investing their money, paying off the loan, and keeping the rest of their profits.
However, premium finance isn’t available to customers with less than $1 million in liquid assets. In addition, premium finance loans involve risks, such as variable interest rate jumps and underperforming assets. While lenders might cap variable interest rates at specific levels or provide fixed interest loans to mitigate risk, policyholders will pay more up front for these perks.
Premium Finance For Life Insurance Tips
- A financial advisor can help you with your life insurance needs and any other questions you have about protecting your family’s future. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
- High-net-worth individuals often oversee numerous financial projects simultaneously, multiplying their responsibilities, concerns, and opportunities. To help sharpen your financial strategy, use this guide to high-net-worth wealth management.
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