Online Insurance Quotes

Oct 22,2008

A marketing concept that is crntly being used by many wealthy individuals in premium financing. Especially when there exists a requirement for a considerable amount of life insurance coverage for business planning. For people with significant assets, premium financing is a method that funds the purchase of life insurance. However, this applies when the individual either does not have, or does not wish to use existing liquid capital to pay the premium on a life insurance policy. In this situation, the individual policy holder rather than using cash, borrows money to pay the life insurance premiums. Now, since he or she has more available capital, as they are not paying the life insurance premiums, this makes available business or personal investment capital that can now be used more effectively for other uses.

In the majority of cases, those who represent the best prospects for premium financing have a minimum net worth of at least $5,000,000. Assets are then pledged as collateral and usually consist of personal assets, which can now be offset by the cash value of the policy being financed. In many cases, the entity that borrows the capital will be a partnership, corporation, or trust. Lenders may often jointly develop premium financing programs, providing the financing while insurance carriers are providing the coverage. When death occurs, a portion of the death benefit is then used to pay off the loan to the lender. If so desired, the loan can be paid off earlier.

There are many benefits to premium financing. When financing is used to pay premiums this lowers out-of-pocket costs and potential gift taxes, in turn freeing up business or personal investment capital that can now be put to more efficient use. In addition to this, it is possible to use premium financing to provide a substantially greater internal rate of return on life insurance policy death benefit paid out as compared with other non-financed methods.

How Premium Financing Operates

The concept of premium financing is simply where your client borrows money to pay life insurance premiums. In actuality, the transaction itself can be quite complex. You should therefore always involve in the process, legal and tax advisors.

While it can be said that each premium finance transaction is unique, still every transaction consists of two separate financial instruments. One is a permanent cash value life insurance policy, and the other a loan. There are two steps to the process, and they are;

1. The Life Insurance Policy

The initial life insurance application process is very much like any other life insurance application. The life insurance company most carrying out medical and financial underwriting procedures in order to determine if the client qualifies for coverage.

2. The Loan Application

First the policy is approved, then a loan application most then be submitted to the lender for approval. The lender reviews the client's credit and financial status and then decides whether or not to make the premium loans.