Premium financing is one of the hottest sales ideas right now, along with Section 412(i) plans and Section 419 plans. Space constraints preclude discussing all three concepts, so well focus on just one, premium financing.
If your prospect is heavily invested in illiquid but profitable assets, he or she may not have the ready cash to pay for a life insurance policy. And, convincing the prospect to sell some of these assets may be difficult, if not impossible.
For example, the prospect may have a large estate, with the primary asset being a closely-held business. Or, the primary asset may be a highly appreciated investment portfolio. Selling a part of the business to raise liquid funds may not be possible. And, the prospect may consider it unacceptable to have to pay income taxes associated with selling appreciated stocks.
So, though the need for life insurance may be great, the prospect may have no liquid funds to purchase it. This is where premium financing can help.
Premium financing is a program whereby the insurer (or agent) helps the prospect pay for life insurance by introducing the prospect to a source of funds. The source is a lender who has a relationship with the insurer.
A basic program may provide funding for the life insurance premium, at an interest rate somewhat lower than customary lending rates. The lower rates are designed to get the business for the lender, as compared to other lenders that the prospect may contact.
To make the program work, the customer must be able to earn more after taxes on his investments, than is being charged as interest by the lender. This arbitrage, so to speak, enables the customer to get the needed insurance, while keeping his or her funds earning a higher rate than the cost of borrowing the insurance premium. This spread makes the transaction profitable for the customer.