Premium financing is a way for high-net-worth individuals or businesses to pay for a life insurance policy’s premium. For large plans, life insurance premiums can be very high and these individuals may not want to tie up their liquid capital or investments in order to pay the costs. If an individual uses premium financing, then a specialized lending institution can provide funding to pay the high insurance premiums in order for the individual or business to attain the protection or income asset they need.

Similar to buying a home, someone can utilize premium financing to acquire an asset they need without having to go out of pocket for all of the cost up front, or over the course of time. Often times, the individuals or businesses that need a very large life insurance plan have the net worth to qualify, but not necessarily the liquidity to fund the plan. Or, there are better uses for their liquid assets – growth of a business, market investments, etc. In either case a large, permanent life insurance policy can be acquired for substantially lower cost.

At its most basic level, premium finance operates like any other loan; you borrow a sum of money and then pay interest on that money while you use the borrowed funds to pay for and acquire an asset. However, in the case of premium finance, the funds are only going to be used to pay the cost of a permanent life insurance plan. A client’s income (business revenue) and net worth dictates how much can be borrowed and what the loan rate from the lender will be. The life insurance asset is designed to be the collateral on the loan itself (in the first few years there might be additional, temporary collateral required until the plan has built up enough internal cash value) and the policy will eventually pay the lender back for the borrowed funds. Clients can pay a percentage of the total premium, or they can pay interest, or both; all plans are customized to each client and situation.

Historically, the largest risk for these solutions can be the client themselves. An individual or business needs to commit to funding the asset properly or risk either having to put up additional collateral, or having the lender liquidate the plan. Volatility in the market can sometimes play a role in terms of lending rate fluctuations or inadequate returns within the insurance plan. A poorly designed plan can exacerbate those problems as well, which is why it’s vital to properly consult with the client(s), their tax advisors and their legal counsel if they have them, in order to verify a potential candidate properly qualifies for this solution and the plan is being built correctly to suit their needs.

The very first step to qualifying for premium financing is to determine if you (the client) has a protection or income need. If it’s determined that a permanent life insurance plan fits into the client’s portfolio – whether for a business buy/sell, key-person, deferred compensation or for a family’s estate plans or charitable gifting – then premium financing can be discussed as one of the possible solutions to their needs. Once a need for the plan is established there will be consultation meetings to discuss what is needed and why, followed by initial designs for the client’s review. If the design fits the client’s needs, then tax return documents, personal financial statements, and business or trust formation documents are gathered and the client’s/business’ eligibility is reviewed. Business revenue or personal annual income along with net worth and a measure of liquid assets will determine if a client qualifies for the lending. A typical health and financial underwriting review at the insurance carrier(s) will determine the client’s eligibility for the insurance itself.

Let’s take a look at an example plan: Mr. & Mrs. Client, who are in their late 60’s, need a $15 million-dollar joint life insurance plan for their estate tax needs. The out-of-pocket cost of that plan is $300,000 per year for 10 years. With premium financing, they could instead pay only $50,000 per year for that same 10-year period and borrow the remaining funds from a specialized premium finance lender. Rather than a total out of pocket cost of $3 million dollars, their cost at the end of 10 years is $500,000; 16.7% of the total. This solution allowed these clients to acquire the asset they need for a fraction of the total cost. This is just one of the ways a client could use or pay for the financed plan (a percentage of the total premium). Another common way is to borrow 100% of the premium funds but then pay all of the interest on those borrowed funds, rather than having that interest capitalized and rolled into the repayment.

Typically, premium finance is not a solution that an insurance agent can provide to their clients unless that agent has already had experience with premium finance. It’s a catch-22. Many lenders and insurance carriers either require prior experience with this solution, or they require the agent to partner with a third-party entity that is authorized and experienced in premium finance. WCI Brokerage is such an entity with years of premium finance experience.

An agent or advisor looking to provide premium finance solutions for their clients can partner with WCI Brokerage in a multitude of ways. WCI can either do 100% of the work from A to Z – client consultation, case design, point of sale, negotiations with the lenders, underwriting, implementation, and annual reviews – or we can take a back seat and only jump in for certain aspects of the process. Our services are tailored to our partner’s needs.