How Does Premium Finance Life Insurance Work?

Premium Finance Life Insurance is not something that you hear about every day, mostly because so few people are eligible to apply for it. Those who can qualify for this type of life insurance policy funding stand to gain a great deal of money if all of the variables associated with the transaction remain in their favor. In fact as much as 15% of the face value can be seen in a return only two short years later-with no investment! With millions and millions of dollars involved in the transaction, you can calculate just how lucrative a 15% return would be.

This is how Premium Finance Life Insurance Works. You must first have an insurable net worth or asset value, called an insurable interest, of more than two million dollars. These policies have been written for up to $100 million. You apply through a premium finance broker for the life insurance policy and the financing at the same time. If the lender approves your Premium Finance Life Insurance loan, you will be given the premium money for the policy for two to five years or “life”, depending on what your requirements are. Obviously the insurance policy will be quite substantial, as there are a great deal of assets being covered. Therefore the premium payments are also going to be quite significant. This is why a low interest loan to cover the cost of these premiums is so appealing. At the end of the two year period you will then have the legal option of selling this life insurance policy into a secondary market for 3% to 15% of the face value, less the paid-to-date premiums loan and interest charged by the lender, and settlement fees.

This type of arrangement definitely sounds too good to be true, but it can be just that easy to make a huge return on no investment if you play your cards right. First you have to realize that not just anyone can apply for Premium Finance Life Insurance. You typically have to be at least 69 years old but no older than 85 to even apply. If you meet these requirements and are approved for both the loan and the policy, you must live through the two year repayment period in order to have an opportunity to sell the policy to the secondary market. If you die prior to the two year mark, your beneficiaries will receive the face value of the policy less the paid-to-date premiums and interest charged by the lender. An example : Assume a five million dollar policy with annual premiums of $350,000 and a 10% interest rate. The beneficiaries receive $4,230,000 if the senior passes at the two year mark.

Obviously, life insurance companies are aware of what Premium Financing is all about and have added that anyone looking to apply for it needs be in decent health. They may ask for a detailed estate plan. Insurance companies are also unhappy when life insurance policies are sold to secondary markets because then those policies become much less likely to lapse. Insurance companies count on the lapsing of insurance policies to keep their earnings high. This is because if the policy holder allows his or her policy to lapse, the insurance company gets to keep all of the premium money that had been paid minus any small accrual of benefits that have cash value. When all high profile life insurance policies are guaranteed eventual payment, it certainly puts a strain on insurance executives’ pockets.

It is anticipated that for these reasons insurance companies may soon find ways to make premium financing less available and attractive. Already, during the underwriting process they will ask the senior if anyone has talked to them about selling their policy in two years, and if the answer is “yes,” the company will not underwrite the policy. But for now the buzz of possible investment dollars is being heard loud and clear on Wall Street, and interest in the secondary market purchase and sale of life insurance policies is growing rapidly. Lenders like Goldman Sachs find this an attractive area, and investors like Warren Buffet see the investment of paying premium money for these life insurance policies as a very small sacrifice for a return of about 12 to14%, the industry average.

 

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