Premium Financed Life Insurance:

How Does It Work?

Premium Financing is a strategy whereby a qualified borrower accesses third-party financing to pay for large life insurance premiums. The insurance companies have constructed specific products for these financed plans to minimize outside collateral needs and maximize returns. This allows individuals and businesses to leverage current assets, maximizing returns via a predetermined cash flow.

 

Every premium financing strategy is custom-made, with every strategy following a similar path:

 

1. The process begins by determining insurance coverage needs and financial suitability.

 

2. A preliminary case design is developed and discussed.

 

3. Many variations of the design are run until the ideal plan is picked by the client.

 

4. Formal insurance carrier underwriting and bank financing applications begin.

 

5. The policy is issued by the insurance carrier. The financing bank requires the owner of the policy

     be an Irrevocable Life Insurance Trust (ILIT), or an LLC.

 

6. The client provides collateral to the bank in the years when the loan balance is above the cash value

     inside the policy (usually 8-12 years if insured is under age 60). The shortfall collateral consists of

     cash and cash equivalents.

 

7. When approved the bank wires the premium payment(s) to the life insurance company.

 

8. Annual reviews should be conducted to evaluate insurance policy performance and ensure

    successful renewals.

 

9. Once the policy generates cash value above the loan balance the owner can request tax-free loans

    based on the excess cash value inside the policy beyond the loan balance.