Would you borrow money to pay your insurance premiums? There are situations where this may be an ideal option, when you don’t want to use your cash to pay for insurance, but you still need the coverage. Premium financing is for ensuring insurance while still keeping cash in hand.
“Insurance is vital to estate planning as well as for protecting your business and personal assets,” explains Richard Cayne of Meyer International. “Premium finance allows certain investors to get the policy or policies they need without affecting their liquidity.”
What does premium financing cover?
Typically, premium financing for life insurance is a solution for high-net worth individuals who need a lot of coverage but who don’t want to liquidate their assets to cover the premium. These policies are not a typical $150,000 term life policy for $50 a month. At thousands of dollars a month, HNWIs will often prefer to finance the premiums. They can then keep their money in investments that are earning more (hopefully) than the interest being charged on the loan.
Companies look to premium financing so that they can keep their capital for operations. Also, certain policies may require a lump sum payment instead of (or as well as) monthly premiums. This is something that most companies would rather not do. Premium financing allows them to pay up front and negotiate monthly payments on terms that are better suited to their bottom line.
There are also lenders that are willing to undertake premium financing for more than one policy, so this may be ideal for HNWIs who also need coverage for their family-owned business.
Is premium financing for you?
Premium financing also comes with its own sets of risks. You need to consider interest rates, collateral values, credit ratings, and more. Also, most premium financings are for terms shorter than the insurance policy(ies), so you need to try to predict whether you may face different (less favourable) terms when renewal time comes around. For example, if your collateral is real estate and it loses value, the lender may want to change or require more collateral.
The available options and their variables are such that you shouldn’t go this alone, no matter how meticulous you research the topic. This is an area that you definitely should discuss with a financial expert who has experience with premium financing, such as Richard Cayne.