All You Need to Know About Premium Financing

Premium financing is a process wherein the permanent life insurance policy premiums are being paid by some of the third parties or third party lenders and it is an excellent marketing idea. In other words it can also be put forward as premium financing is a process which aims to increase your insurance needs by the method of financing the insurance. Thus premium financing enables individuals, business firms and the large companies to purchase the insurance without having to sell or lock up the various assets.

Premium Financing

The working of the premium financing works in the following way consider for example you are owning an insurance policy worth X amount of dollars and you can use the value of your insurance policy as a mode of collateral security which will enable you to finance other insurance policies. Thus in this way premium financing allows you with a wide range of insurance options open to you. There is no doubt that premium financing is very much cost effective. It is a very favorable financing option as you can secure a huge loan amount against the life insurance policy. It is quite important to understand that you are going to get a much better option or in other words you will get much better rate of interest and the term of loan for the secured and the unsecured financing.

life insurance policy premiums

However it is important that before getting a premium financing option you need to have a look at your financial needs and get proper advice before you go on with a financing option. There is this one question which many people have as to will it be required for them to purchase a new insurance policy or can they get the service of premium financing on their existing insurance policies. Well the answer to this simple question would be that at the time the practice of premium financing came into existence it was a requirement that you will have to purchase new insurance policies, but now this is not the case as you can get this option of premium financing on your existing insurance policy and there is no requirement for you to take the strain of going for a new insurance policy. This will again provide you with a very much better option that would not ask for your valuable possessions to be given as collateral security.


Some other people who really take the benefit of premium financing are the wealthy investors or the business owners. It is an extremely good option for the companies that do not want to tie up their assets to purchase the large amount of insurance policies. It is also a technique which is offered for the employees to be offered as a part of their wages. It allows the firms to attract new employees and help them retain their valuable employees. Premium financing is also used as a technique for estate planning, company expansion, attracting new employees and retaining their valuable employees.

Life Insurance Premium Financing

Life insurance premium financing is used by wealthy individuals to pay their life insurance premiums. By financing your premiums, it allows you to free up the funds that might have otherwise been used to pay your premium. Many wealthy people require a substantial amount of life insurance for business planning, estate planning, or for income replacement.

Insurance Premium Financing

In order to qualify for life insurance premium financing most insurance companies require you have a minimum of $2.5 million in net worth and at least a $200,000.00 a year income. In addition, you must be bankrupt remote entity, such as a Limited Liability Corporation, or an Irrevocable Life Insurance Trust.
In a normal premium financing arrangement, you would apply for a policy at the same time you apply for a loan. The loan is usually arranged by the insurance company you are working with although there are many different companies that handle only the financing and do not deal with the actual insurance policy. While you are being medically underwritten for the life insurance policy, your loan is being processed. Assuming you pass the medical exam and qualify for the loan, the policy and financing are put into place at the same time.
The benefits of a premium financing arrangement is that it frees up business and personal money to be used more efficiently in other investment arenas. In addition, life insurance premium financing may minimize gift taxes, and can provide a greater rate of return on the death benefit paid through regular non-financed methods.

 Life Insurance Premium Financing

Life insurance premium financing loans may be repaid either by paying a monthly payment while you are alive, pay from the policy itself, or at the time of your death, proceeds from the policy will pay off the loan.
Interest on the life insurance premium financing loan is considered to be personal interest, and therefore, not tax deductible.

If you are considering a premium financing loan for estate planning, there are some tax issues you may want to consider. The life insurance proceeds will be included in your estate if you own the policy. If the life insurance policy is owned by an irrevocable life insurance trust, estate taxes on the death benefits may be avoided.
Before you consider financing your life insurance premiums you should be aware that the life insurance policy will have to earn returns of between 150 to 300 basis points over the interest rate of the loan.

In addition, you should ask what the loan commitment fee is, as well as knowing whether the life insurance premium financing loan is renewable, how long the term of the loan is, and if the loan extends well beyond your life expectancy.
You may want to find out if the loan requires a personal guarantee, or if the loan is guaranteed by the life insurance policy.

Also, you want to know how if the program is designed on your IRS calculated life expectancy or is it conventional. If the loan is based on your life expectancy, and you live beyond that, the loan amount will exceed the cash value and the whole program will come apart.

Before entering into a financing agreement you may want to consult a trusted attorney, your financial advisor, and/or your Certified Public Accountant.
You will also want to shop around and compare insurance companies, their individual plans, the premium amounts, and the different types and amount of life insurance available to you.