What Is Premium Finance?
Premium finance is a strategy where financial institutions pay all or part of an insurance premium to help fund a high value life insurance policy where the cost of the premium adversely affects cash flow of the business or individual. The bank loan is later repaid either through cash value appreciation or death benefit proceeds.
Why Use Premium Finance
Premium financed life insurance allows high net worth individuals and businesses the ability to utilize life insurance for funding certain needs while keeping personal or business funds liquid for other opportunities. For example:
- wealth creation
- wealth preservation
- key man coverage
- buy-sell agreements
- business succession planning,
- retirement funding
How Does Premium Finance Work?
Although each premium finance arrangement is unique, typically an individual and bank jointly fund the first 5 years of a 15 year policy. The bank subsequently funds the next 5 years. The remaining 5 years require no funding. At the 15th year, the bank loan is repaid through cash value accumulation in the policy.
In the hypothetical example below, day 1 starts with a $1,059,930 Death Benefit. By year 16, the policy would generate $58,000 in retirement income! Financial leverage means you only pay 50 % of the premium for 5 years!
Hypothetical Example For 55 Year Old Male
Notice immediate death benefit of over $1million with equal annual contributions by bank and individual.
Death benefit grows to $1.3 million, cash value to $345,889 and $0 individual contributions! The bank contributes $67k for the next five years!
Protection With Retirement Income Growth
The policy is growing during this period with NO further contributions! The death benefit is designed to decrease (still $535k!) while shifting growth to retirement funding of $58k/year at 16th year!
The policy is now generating income of $58k per year. The total individual contribution was $175k. It only takes three years of income after year 16 to generate $174k!