What Is Premium Financing For Life Insurance?
Premium financing is the use of a third-party loan to pay insurance premiums on a life insurance policy. This can benefit high net worth individuals with a whole life policy and a large death benefit. In this case, insurance premiums can become costly. Rather than liquifying other assets and capital, the policyholder can offer their capital as collateral and pay the loan back over time. Although there are some risks, this is a win-win scenario for both the loan provider and the policyholder when executed properly.
Benefits Of Premium Financing For Life Insurance
The benefits of a premium financed life insurance policy include the potential for a much higher death benefit, the avoidance of selling assets and capital, and significant tax advantages.
Maximize Your Death Benefit
Premium financing allows you to choose a larger death benefit than you otherwise may be able to without sacrificing your assets and capital. In addition, it may allow you to choose a whole life policy rather than a term life policy. You also gain assistance for the higher premium costs (through your third-party loan).
Avoid The Sell Of Assets And Capital
One major concern that many high net worth individuals have when purchasing a premium financed life insurance policy is the fear of needing to sell some of their capital in order to offer the premium costs each month. Premium financing assists (or entirely covers) the premium covers for you. You can pay the premium costs back over time and/or use some of the proceeds of the death benefit to cover the loan and loan interest.
Receive Significant Tax Advantages
There are several ways in which premium financing is beneficial from a tax perspective. First, the life insurance policy is free from taxes as long as the policy does not end until the policyholder’s death (this is known as a whole life policy). Specifically, both the death benefit (the payout) and the cash value that accumulates over time with the policy are free from capital gains taxes and other federal, state, and local taxes.
What Are The Risks Of Premium Financing For Life Insurance?
As is the case with all investments, there are some risks involved with premium financing. First and foremost, you could be at risk of owing more in loan balance than your collateral is able to cover. This is particularly a concern if your cash surrender value underperforms. Although riskier than some other life insurance options, it can be a great opportunity for certain high-net-worth individuals.
Ready To Learn More About Premium Financing For Life Insurance?
Premium financed life insurance offers a way for high net worth individuals to avoid the sale of important assets in order to fund premium costs for a high-value life insurance policy. Here at Vector Financial Group, we help our clients throughout the entire premium financing process. Call us today or send us a message to get started.