The primary service we offer within the insurance industry is embedded in the question we are most frequently asked: What is premium financing? Here, we will provide an easily-understood explanation, whether you are inside or outside of the insurance industry, and help you understand what this type of financing can do.
Premium financing at its root is the process of lending funds provided by a third party to cover the cost of an insurance premium. We are one of the third-party entities that facilitates that transaction. Whether it be through a brokerage providing a premium finance platform or companies devoted to financing the premiums of certain insurance sectors only, the playing field for such services is wide. Let’s look at life insurance as one example.
What is premium financing for life insurance?
When used properly, life insurance can be a very valuable tool. Life insurance plays a critical role in estate planning. Wealthy individuals and successful entrepreneurs can minimize the level of estate taxes they have to pay – while addressing end-of-life business obligations – through the smart use of life insurance. How does it work?
Premium financing for life insurance allows one to borrow future monies to pay for today’s needs. The wealthy individual borrows the money from a third-party provider. Expectedly, the loan will be paid back with interest, though rates are usually very low. Premium financing companies do so much volume that they can take on greater risk and thus, charge lower rates.
This is where the intricacies of life insurance make this an attractive business proposition. Since money within a life insurance policy grows tax-free, any profit can be repurposed back into the business, or to cover loan interest or origination costs. Or you can take a lovely trip to Hawaii! After all, it’s your money, and it’s up to your discretion as to how you spend it.
How are premium financing transactions structured?
When an individual borrows the money required to pay insurance premiums, they are paying on the loan interest at an annual rate calculation. The best part? The interest can be wrapped into the loan itself. This means that the life insurance policy itself can be used as collateral. If not, other forms of collateral would have to be employed.
Although there is no single way to set up this financing option, this is not a bad thing. Having many different options allows for greater range of choice when a successful entrepreneur is evaluating the benefits at hand. Still, far too few are taking advantage of the lucrative opportunity afforded by financing life insurance.
In fact, surveys have shown that only one in 10 use a strategy like this when they purchase and manage their life insurance policy. Why? Because it is either not a good fit for their business or the financial professionals they rely on are not proficient in implementing this strategy. This is where training is critical. To offer these services, the offering entity must be trained on them.
In a study asking over 800 financial services providers if they felt fully knowledgeable of premium financing and life insurance services, 40 percent said they were at least aware of the strategy, but less than five percent responded that they had ever completed the service for a client. That is an incredibly low number. There is a lot of money being left on the table!
At COST Financial Services, we understand the importance of recognizing the many variations that life insurance can be funded with and how to use it to your strategic advantage. We have been in the premium financing game for a long time. This extremely versatile way of handling life insurance can be great for the insurers we do business with. Contact us today to see if this option can work for you!