How to Finance Life Insurance Premiums

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Contributor, Benzinga
February 8, 2022

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Ordinarily, life insurance companies expect you to pay your premium at the time your policy is issued. If the premium is too much to pay all at once, your insurance provider may offer payment plans such as monthly, bi-monthly, quarterly, semi-annual or annual. 

Depending on the amount, paying premiums upfront is not always possible or practical, and it may be preferable to use financing to pay them. 

To broaden your knowledge, Benzinga explains what life insurance premium financing is, how it works and the risks. An overview of why some insureds opt for life insurance premium financing also is provided. 

What is Life Insurance Premium Financing?

Life insurance premium financing is much like taking out a loan for any other purpose. You take out a loan from a third party and use it to pay your life insurance premium. As with other types of loans, the lender will charge you interest, and you will need to pay regular installments until the loan is paid off. 

If you die before the loan is paid off, the death benefit can be used to pay off the balance. 

Life insurance premium financing can be a valuable estate-planning tool for people with high net worth because it allows them to acquire life insurance policies in high amounts without having to tie up their capital. 

Life insurance premium financing can help you maximize your wealth to keep your legacy intact for your beneficiaries. 

It is legal and acceptable for you to finance your life insurance premiums, and it is a common practice among high-net-worth individuals. 

Why Finance Life Insurance Premiums?

More than half of U.S. residents have a life insurance policy of some kind. For those who have term policies or have low to middle incomes, life insurance policies are typically very affordable.

People who need high levels of life insurance benefits to protect their wealth can expect to pay high premiums, which may be difficult to pay at various times of the year or during various seasons of life. 

By financing your life insurance premiums, it is possible to pay high-dollar life insurance premiums without having to liquidate other assets. Life insurance premium financing ensures your beneficiaries have a reserve of funds from your life insurance policy to pay for the estate taxes, which otherwise may be difficult.

To further reduce estate taxes, you can create a life insurance trust — also called an irrevocable life insurance trust (ILIT) — to hold your life insurance policies separate from your estate. 

In addition to covering the cost of estate taxes, high-value life insurance policies allow you to retain control over illiquid or significant assets. For example, your life insurance policy could protect real estate assets or your investment portfolio if a large portion of it is dedicated to a single stock. 

Owners of high-value businesses will find that life insurance premium funding affords them the benefit of higher life insurance protection without comprising the business’s capital.

Beyond businesses and individuals with a high net worth, people with average incomes and net worth may want to invest in a higher-dollar life insurance plan, and life insurance premium financing makes that possible. That said, a personal loan may offer fewer risks than insurance premium financing.

What are the Risks of Premium Financing?

Any loan you pursue has risks, and there are distinct types of risks associated with life insurance premium financing. The most common risks include fluctuations in interest rates or qualification and policy earnings risks. 

Interest Rate Risk

Most often, life insurance premium loans carry a variable interest rate. This works in your favor when interest rates are low. However, interest rates could rise at any time. 

In the worst-case scenario, the high interest rates could defeat the advantages of financing your life insurance premiums in the first place. 

Qualification Risk

If you do not pay off the loan before the end of the term, lenders may be willing to renew the loan. Lenders typically require you to requalify for the loan at the renewal time. Requalification can entail reevaluating your collateral, such as real estate, stocks and other assets. 

If the lender believes your collateral is not sufficient to support your loan, you may need to produce additional collateral. If you lack sufficient collateral, the lender could call the entire loan due or increase the interest rate. 

Policy Earnings Risk

Lenders keep tabs on the cash surrender value of your life insurance policy. If it starts underperforming, they will ask you to provide additional collateral, which may not be easy to find. 

In the event the death benefit does not grow, it could create a situation where there is not enough coverage to satisfy the loan. The result might be that your estate would have to repay the loan, and that could place a hardship on your heirs. 

Compare Life Insurance

Preparing to Finance Life Insurance Premiums

If financing life insurance premiums will benefit you, how do you go about positioning yourself or your business to get this type of loan?

First, review your credit rating. Several credit rating sources offer tips on improving your credit score, which will enable you to get the best interest rate possible. 

Second, pay down your debts as much as possible to make your income-to-debt ratio more favorable. 

Make your payments on time. Keep track of when payments are due, and get them in on time or at least within the grace period. 

Review your options of financing sources. Look for a loan that has a cap on how much the interest can increase during the term. You might also find a lender that offers interest at a fixed rate, which will help in budgeting.  

Depending on your life insurance contract, you may be able to add a death benefit rider to your policy. Your beneficiaries will be able to recoup the amount you paid for your policy, less any funds you withdrew. 

Some of these strategies will add to the cost of your policy, but they will mitigate some of the risks associated with life insurance premium financing.

Laws and regulations in the finance industry change periodically. For example, financial advisers used to recommend their clients take out a home-equity loan to finance their insurance premiums. With the passage of the Tax Cuts and Jobs Act in 2017, the interest on a home-equity loan can only be deducted if homeowners use it for building or renovating a home or purchasing another home. It is often better to opt for a personal loan to get the best tax advantages. 

If you still need more information, your insurance agent will be happy to discuss your options. 

Insurance Premium Financing

Insurance premium financing is a good choice if the benefits outweigh the risks, and you cannot find another way to pay your life insurance premiums. Review your options and any alternatives at every renewal. 

For more information on life insurance premium financing, life insurance and estate planning in general, check out Benzinga’s expert articles.   

Frequently Asked Questions

Q

How do you qualify for premium financing?

A

After exploring your options, apply for life insurance premium financing much as you would for any other type of loan. Have a list of your personal or business information and assets handy. 

Your lender will approve or decline your application or ask you for additional information. The lender will also disclose the terms of the finance agreement it is offering you. If it declines your application, it will supply a reason, and that will tell you what you need to do to qualify for financing.

Q

How do premium finance companies make money?

A

Premium finance companies make money by borrowing money from other sources at a certain interest rate and lending the money to policyholders who need money to pay their premiums at a higher interest rate.

Methodology

Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.

About Maurice Draine

Maurice Draine is a former insurance agent, broker, underwriter tech, and agent sales support rep with over 15 years of professional writing experience. Maurice helps insurance, financial, and various online and ad agencies, create the words that drive customers to their websites and keeps them there.