What is premium financing?
Premium financing is a specialized type of loan used to pay the cost of a permanent life insurance plan. It is an effective strategy for high-net-worth individuals (HNWIs) or businesses to pay for the high premiums associated with life insurance policies without tying up liquid capital or investments.
Through premium financing, a specialized lending institution provides funding to pay the high insurance premiums for the policyholder to attain the protection or income asset they need. At its most basic level, premium finance operates like any other loan—you borrow a sum of money and then pay interest on that money while you use the borrowed funds to pay for and acquire an asset. In premium financing, the funds are only used to pay premiums on a permanent life insurance policy.
A client’s income—or business revenue—and net worth dictate how much can be borrowed and at what rate. The life insurance policy is designed to be the collateral for the loan. In the first few years, there may be additional (temporary collateral) required until the plan has built up enough internal cash value. The policy eventually pays back the loan.
Why should someone use premium financing?
Similar to buying a home, premium financing is used to acquire an asset without paying the entire cost out-of-pocket. Many individuals or businesses that need a large life insurance plan have the net worth to qualify but do not have the liquidity to fund the plan, or prefer to invest their liquid assets. In either case, a permanent life insurance policy can be acquired at a substantially lower cost.
Here is an example plan. A client in their late 60s needs a $15 million joint life insurance plan for their estate tax needs. The out-of-pocket cost of that plan is $300,000 per year for ten years. With premium financing, they could instead pay only $50,000 per year for that same ten-year period and borrow the remaining funds from a specialized premium finance lender. Rather than a total out-of-pocket cost of $3 million, the cost at the end of 10 years is $500,000. In other words, 16.7% of the total. This solution allows the client to acquire the asset they need for a fraction of the total cost.
This example is just one of the many ways a client could use or pay for the financed plan (a percentage of the total premium). Another common way is to borrow 100% of the premium funds but then pay all the interest on those borrowed funds, rather than having that interest capitalized and rolled into the repayment. Clients can pay a combination of interest and a percentage of the total premium. Customized plans are created for each client and situation.
What are the advantages of premium financing?
One of the significant advantages of premium financing is that a HNWI or business can purchase their desired insurance solution while maintaining the freedom to deploy their capital and assets into other investments.
Premium financing is also a strategy for estate planning. Premium financing may be utilized to fund a permanent life insurance plan without liquidating assets, which prevents them from triggering capital gains taxes.
What are the disadvantages of premium financing?
Historically, the most substantial risk for premium financing solutions can be the client themselves. An individual or business needs to commit to funding the asset satisfactorily. If not, they risk having to provide additional collateral or the lender liquidate the plan. Volatility in the market can sometimes play a role in lending rate fluctuations or inadequate returns within the insurance plan. A poorly designed plan can exacerbate those problems. It is vital to properly consult with the client, tax advisors, and legal counsel to verify that a potential candidate qualifies for this solution. Building a sound plan to suit the client’s needs is imperative.
How do I select the best premium financing for my client?
Premium financing is a highly specialized service design for clients who need large, permanent life insurance plans without sacrificing liquid assets. It is as much about finding the right client as it is about finding the right broker. Before introducing premium financing to a client, consider their whole situation, including their income or business revenue, net worth, goals, health, and more.
The premium financing market is a small, regulated space reserved for individuals at the highest income levels. If your high-net-worth client needs a large permanent life insurance plan, then premium financing is up for discussion as a possible solution to their needs.
If premium financing is a good fit for your client, you will need to find a specialized lending institution equipped to determine eligibility and offer the loan. Business revenue or personal annual income, net worth, and a measure of liquid assets will determine if a client qualifies. A typical health and financial underwriting review by the insurance carrier will determine eligibility for the insurance.
Often, premium financing is a solution that an insurance agent can provide to their clients only with prior experience. Most lenders and insurance carriers either require some experience with this solution. These institutions may require the agent to partner with a third-party entity authorized and experienced in premium finance. An example of a third-party entity with experience is a brokerage general agency (BGA).
How do I find the best premium finance brokerage general agency?
You can start by researching several insurance brokerage agencies in your area. We recommend looking for these qualities in a BGA:
- You want a brokerage firm that understands the market and can provide assistance. Not every BGA has experience with premium financing. Are they able to answer and acknowledge all of your questions?
- Provide reliable services. Do the options that they provide include the benefits and requirements requested?
- Responsiveness and attentiveness. Are they knowledgeable of the products and solutions available to serve you and your clients’ needs?
- Back-office support. What happens after an application is submitted?
- A good team instead of just a good salesperson: Make sure that the service is as good as the pitch. Service can make or break a relationship.
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EMG can help
As a brokerage general agency, EMG Insurance Brokerage handles everything from submission to the commission. Our relationships with over 30 carriers allow us to help choose the best solution for your client. We will walk you through the process and help you customize solutions for the unique needs of each client.
Our team of premium financing experts can provide any level of support you may need, including client consultation, case design, point of sale, negotiations with the lenders, underwriting, implementation, and annual reviews. At EMG, there are no additional fees for premium financing.
Connect with us by phone, online, or in-person and schedule a consultation with your sales director today to discuss whether premium financing is a good fit for your clients.