Premium Financing: Leveraging Loans to Purchase Permanent Life Insurance
Premium Financing is a sophisticated strategy where a policyholder borrows money from a third-party lender (typically a bank) to pay the premiums for a large Permanent Life Insurance policy, often a Universal Life or Whole Life policy. This strategy is exclusively used by high-net-worth individuals.
The Mechanics of Premium Financing
The policyholder enters into a contract where:
- **The Policy** is the collateral for the loan. The cash value growth is intended to be sufficient to cover the loan interest and principal over time.
- **The Goal** is to secure a large death benefit immediately while keeping the policyholder’s capital invested in their own higher-returning assets.
- **Risk:** If the policy’s cash value growth (or dividends) is lower than the interest rate charged on the premium loan, the policyholder may be required to put up additional collateral or risk the policy lapsing.
Suitability and Risks
This is a complex strategy carrying significant risk, especially if interest rates rise or policy performance is poor. It should only be considered by individuals who are comfortable with leverage and who have substantial net worth to cover collateral calls.
Disclaimer: This content is for informational purposes only and is not financial or legal advice. Premium financing is a high-risk strategy that requires expert consultation from a specialized financial advisor and legal counsel.