Premium Finance
Whether for estate planning or wealth transfers purposes, senior citizens have an increasing need for life insurance. However, the high costs of insurance for insured’s age 65 and older preclude many of today’s aging baby boomers, who are asset rich and cash poor, from purchasing the coverage they need. The same banks and hedge funds that are buying insurance policies in life settlement transactions are also financing the premiums on newly originated policies for senior citizens. Premium finance is the lending of funds to a person to pay the premiums of an insurance policy.
The insured, age 65 and older with a need to purchase an insurance policy of over $1,000,000 can finance the premiums. Once the policy is issued, the insured will borrow the funds to pay the premiums for a predetermined length of time, usually from 2 years to life. There are currently two types of financing available to senior citizens, recourse and non-recourse financing. In both non-recourse and recourse financing the funder is always an institutional bank or hedge fund.
Non-recourse financing allows the client to borrow the funds and the only collateral for this loan is the policy. A recourse loan is a lending mechanism where the insured puts up a letter of credit or another form of collateral to the funder for the loan. Unlike non-recourse programs, recourse financing options are usually approved by the insurance carrier. They have seen the loan documents and the lender have demonstrated to the insurance carrier that the client has a need for the coverage and that the client has demonstrated sufficient collateral to offset the loan.
Unless the loan is for the life of the policy, the client has three options relating to their policy at the end of the loan term. Should the client have a change in health and feel they would like to keep the policy and don’t think they could qualify for a new policy, the insured can pay back the loan plus a set interest rate and retain ownership and beneficial rights within the policy. If the insured no longer needs or wants the policy they can attempt to sell it in a life settlement transaction. From the sale of the policy, the inured will pay back the loan amount plus interest to the financer and keep the difference.
When an insured no longer wants or needs the policy and there is no secondary value for the policy it will revert the financer. The financer will take over ownership and beneficial rights within the policy, continue to pay the premiums and collect the death benefit at policy maturity. The insured will be out of the transaction with nothing but no cost or low cost insurance for the length of the loan term.
All high net worth seniors over who have a need for insurance should discuss premium financing with their financial advisor or agent. Seniors should be certain that the lender is of institutional nature as defined by each states viatical laws.
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