Information on Premium Finance Life Insurance
If you have a net worth of at least $1 million, you may qualify for a special type of financial arrangement that lets you buy life insurance. This arrangement is called a premium finance arrangement. The premium finance arrangement must be coordinated between the life insurance company and a banking institution.
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Function
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Premium financing takes place between a policyholder, a life insurance company and a bank. The bank lends money to the policyholder who then uses the money to buy a life insurance policy. The loan is secured by the life insurance policy and is enough to pay the policy in full over a set number of years. The policyholder then makes payments to the bank.
Significance
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A policyholder can generally purchase more life insurance by using premium financing since the terms of the loan are not dependent on the age of the borrower. The loan payments are usually lower than what the premium payments would be for the policyholder. Loans are also non-recourse. This means that the bank cannot come after the borrower for the money if the borrower defaults on the loan.
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Benefits
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The policyholder/borrower is able to buy a large death benefit without having to make large premium payments. Since the loan is secured by the life insurance policy, the bank is assured of receiving payments. The life insurer receives all premiums due on the policy, making it an attractive proposition for the life insurance company.
Disadvantages
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Premium finance arrangements have strict requirements. First, banks and life insurance companies are generally unwilling to arrange a premium finance deal without having an assurance that the individual's net worth is at least $1 million. This assures the bank that the borrower has the financial resources to make loan payments and assures the life insurance company that there is a reason for buying a large life insurance policy. The policyholder is generally not allowed to withdraw or borrow from the cash value of the policy under this arrangement. Although many banks just secure the life insurance policy, the bank may also require additional collateral, which ties up the policyholder/borrower's assets.
Considerations
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Make sure you understand all of the terms and conditions of the premium finance arrangement. Consider purchasing a life insurance policy using interest generated from your own personal savings if you don't like the idea of a bank asking for additional collateral for premium financing.
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