Premium Financing: Why The Buzz?

There are a great variety of programs. Some require the borrower to pay the interest each year. Others accrue the interest, in which case the customer may have a zero net outlay. Some lenders re-evaluate whether to make additional loans on an annual basis, when the premium is due. Others may agree to provide loans for a term of years. Some programs are available to individuals, while others may be available only to businesses.

In cases where the premium is large, and, due to financial considerations, where the lender permits the accrual of the interest, the bulk of the insurance proceeds may, at death, go towards paying off the loan. The remaining death benefit would then be paid to the customers beneficiary.

The lenders require collateral. In the early years, the policy values alone may not be sufficient for this purpose, as the cash values may be lower than the premiums paid. And, some policies may be vulnerable to a decrease in value. For reasons like these, the lenders may require additional collateral.

Some lenders may require that the collateral be invested in equity funds they manage. This enables them to earn a management fee in addition to loan chargesmoney that may be used to cover other costs of the program, such as the attractive interest rate. If the lenders management fee is comparable to the borrowers previous money manager, the borrower comes out the same.

The usual bells and whistles for life insurance also come into play. For example, the customer may add a return of premium rider. That way, if the customer pays the interest annually, after paying off the loan principal (i.e., the total premiums), the remaining death benefit can be kept level.

Assuming that the prospect is insurable, the prospect must meet substantial financial criteria. The criteria vary according to the lenders obligation to provide financing, and the nature of the plan. For example, a plan for individuals may have a lower financial threshold, and, if so, it probably has a lower risk for the lender and fewer commitments to the borrower.

The driving force for premium financing is that insurers want to attract high quality business. By providing a program with high end products, and the funds to purchase them, the insurers may offer a more attractive plan to agents and their customers. See charts for examples.

Douglas I. Friedman, a partner in the Friedman, Pennington & Downey, P.C. law firm of Birmingham, Ala., is national counsel on estate and business planning for insurers. His e-mail is [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.