What is Premium Finance
Premium financing involves the lending of funds to a person or company to cover the cost of an insurance premium. Premium finance loans are often provided by third party finance entity known as a premium finance lender. Premium financing is mainly devoted to financing life insurance in large amounts.
To finance a premium, the individual or company requesting insurance must sign a premium finance agreement with the premium finance company. The loan arrangement usually lasts 5-10 years or to the end of the life of the policy. The premium finance company then pays the insurance premium on behalf of individual or company, usually in annual installments, for the cost of the program.
Typically, clients that engage in this transaction are business-owners, entrepreneurs, and other professionals who desire to retain capital while maximizing wealth transfer and providing the potential for tax-free retirement income.
Premium Finance Benefits
- Allows for clients to obtain needed coverage without liquidating other assets.
- Eliminates the requirement for a large up-front payment to an insurance company.
- Multiple insurance policies can be attached to a single premium finance contract, allowing for a single payment plan to cover all insurance coverage.
- The main benefit in premium financing is avoiding high cost in paying premiums out of pocket. By using other people’s money (leveraging a lender’s capital), clients can retain a significant amount of capital known as retained capital.
- Properly structured premium financing may provide additional tax advantages and also may avoid gift taxes.
