Frequently Asked Questions

Premium Financing is an innovative wealth management strategy offering high-net-worth individuals an alternative method of funding life insurance premiums. With Premium Financing, funds needed to pay premiums are borrowed from a third-party lender so that the borrower’s current investment portfolio or other assets may continue to potentially grow. It is also a way for clients to minimize out-of-pocket costs and gift-tax liability.

The lender selection can vary depending on case size and circumstances of the planning situation. Loans may be available from a client’s own bank or from providers who specialize in this market. Loan terms and interest rate competitiveness should be considered. It is also advisable to choose a lender with good financial stability. 

In addition to a signed life insurance financing credit application, a lender may also require; For corporate/business-owned cases: Audited corporate financial statements and tax returns for three consecutive years and a copy of the Articles of Incorporation. If the business is an S-Corporation or closely held business, signed tax returns and personal financial statements for three consecutive years on each owner/partner may also be required. For trust-owned cases: Statements of trust assets and trust tax returns for three consecutive years and a copy of the Trust Agreement. If a trust is newly formed, personal tax returns and financial statements for three consecutive years on the individual who is securing the loan on behalf of the trust may also be required. Additional information may also be required by the lender for loan approval.

In all cases, the lender will require the borrower to assign the policy as collateral and, if needed, will require additional collateral. They may include marketable securities, letter of credit or cash value of other life insurance policies. At the time the policy cash values exceed the loan balance, the lender may begin to release the additional collateral consistent with the lender’s loan policy. The borrower will be responsible for maintaining adequate collateral throughout the life of the loan. Types of collateral should be discussed with each individual lender.

Most lenders will require the borrowers to be entities — including corporations, trusts, partnerships and limited liability companies — and, in limited cases, individuals. Your goal should be to purchase life insurance with funds borrowed at a rate lower than what you expect to gain from other investments. Additionally, as specified by the lender, individuals should have a net worth of at least $5 million, meet the collateral requirements and purchase a policy with a minimum annual premium of $100,000.

In most instances, lenders base the current loan interest rate on the one-year London Interbank Offered Rate (LIBOR) or the Prime rate, generally assessing a spread. The spread is determined on a case-by-case basis and is generally fixed for the life of the loan. The loan amount and the lender’s risk exposure are also taken into consideration when determining the loan interest rate. Note: LIBOR and Prime fluctuate and, therefore, the interest rate received may differ from what was initially illustrated.

LIBOR is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London. It is a standard financial index used in the U.S. capital markets and can be found in the Wall Street Journal. In general, LIBOR interest rates are lower than the Prime Rate.

Prime is the base rate that banks use in pricing commercial loans to their best and most creditworthy customers. The rate is determined by the Federal Reserve’s decision to raise or lower prevailing interest rates for short-term borrowing.

The borrower may pay the interest at the beginning of the year. However, in certain circumstances, the interest may be paid in arrears. In select circumstances, the interest may be deferred and added to the balance of the loan.

Typically, a lender will begin its financial review of the loan application during the life insurance underwriting process. At that time, provided all documentation is complete, the minimum loan review and funding time will vary by lender, but should be between two and four weeks.

The lender will annually reevaluate loan quality to determine whether changes in the borrower’s financial condition or in the relationship between cash values and the outstanding loan balance may require additional collateral or may warrant discontinuance of future loan installments due to increased risk.

The collateral assignment grants the lender a security interest in both the life insurance policy’s death benefit and the policy’s cash value. Generally, this is an absolute assignment and therefore they remain inaccessible to the policyowner until the assignment is released by the lender. The collateral assignment includes the borrower’s representation and warranty that no bankruptcy proceedings are pending and that none of the borrower’s money is subject to an assignment for the benefit of creditors.