What is Premium Financing for Life Insurance?

Premium Financing for Life Insurance can allow you to have what amounts to basically free Life Insurance. Just how does this work?

The basic idea behind premium financing for Life Insurance is that a loan is made by a bank or other financial entity and the proceeds from the loan are used to pay the premiums on a Life Insurance Policy. The loan is repaid with the proceeds from the death benefit. The loan can be collateralized or not although the cost of the loan will be considerably lower if it is.

Most financial advisors view premium financing as be a good option for individuals who have a large amount of non-capital assets such as real estate. The non-capital property can be used as collateral for the loan. The loan can be used to purchase a large amount of insurance without the need for the client to use any capital for the payment of premiums. This is a good way to get assets that may not normally be available for investment purposes to produce a better return.

Premium financing is considered to be a better deal when bank interest rates are low. This is because what is actually happening is another type of wager on performance. The borrower is wagering that the performance of the Life Insurance Policy will exceed the interest rate of the loan. During periods of low interest this wager has a much better chance of succeeding.

Another factor that makes premium financing more attractive is a shorter expected lifetime. The shorter the term of the loan, the less the interest payments will be. It would not be as wise to use premium financing to purchase a policy for a 21 year old man with the idea of paying off the loan with the death benefit. The life expectancy of the young man would be 50 or 60 years and the interest would have to be paid for this entire period. On the other hand, it would make more sense to do it in the case of a 65 year old man.

There are quite a few different methods of premium financing. It would be impossible to discuss them all here. The basic idea remains the same from plan to plan. It is to borrow the money to pay the premium with the idea of repaying the loan with the proceeds of the Insurance. If you have a large amount of collateral that is not being fully utilized, you might be a good candidate for such a plan.

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