Life insurance policy premiums are directly correlated with the amount of coverage they provide. The more coverage a business or person needs, the higher their annual premium will be. Most of the time, individuals are able to take out life insurance policies without rearranging their financial standing to do so. For instance, a “typical” life insurance policy worth several hundred thousand dollars may only cost an individual several hundred dollars per year. Though this is not an insubstantial amount, it’s also not likely to be a cost-prohibitive figure.
On the other hand, businesses and high-net-worth individuals (HNWIs) sometimes require huge insurance policies in excess of $10 million. In such situations, the premiums for these large insurance policies can cost tens of thousands of dollars a year — or more. The problem here is that not every business or HNWI has tens of thousands of dollars available to make those premium payments on a regular basis.
So what can a business or HNWI do if they need insurance but don’t have the cash on hand to purchase it?
One popular option is premium financing. Here’s how it works: rather than directly paying an insurance provider for coverage, businesses or HNWIs instead can take out a loan with a third-party lender to cover the premium costs. Eventually, the policy holder can use the surplus cash value that their policy accumulates to pay back the principal of the loan. Or, in other words, premium financing lets you defer premium payments in exchange for the ability to retain cash and other valuable assets right now.
Benefits of Premium Financing
The most obvious benefit of premium financing is that it allows businesses and HNWIs the ability to retain flexibility with their capital and assets. For example, rather than spending $100,000 a year on insurance premiums, businesses and HNWIs can instead invest that money on profitable ventures related to their industry. As a result, businesses and HNWIs can leverage their available capital to more than offset the costs of their premium financing loan.
In addition, premium financing ensures that businesses or HNWIs don’t have to liquidate assets in order to make premium payments. So businesses and HNWIs won’t have to sell valuable property or unload profitable stocks if they utilize premium financing.
Lastly, premium financing also allows for businesses and HNWIs to acquire vital insurance coverage. Though this may seem obvious, the truth is that without extensive coverage, businesses and HNWIs may be vulnerable and incapable of planning for their future.
…premium financing lets you defer premium payments in exchange for the ability to retain cash and other valuable assets right now.
Premium Financing Requirements
The other half of the first step is the insurance acquisition. There are 2 basic ways that insurance is structured in a buyout arrangement, either the business entity owns one policy per partner, or each partner owns one policy on every other partner. The buyout insurance market is much more complex than personally owned life insurance and anyone looking to purchase buy-sell life insurance should work
Premium financing is not available to all businesses or individuals. Rather, businesses or HNWIs need to meet a set of criteria to even apply for premium financing. A few of these stipulations include:
- Substantial insurance needs.
- A net worth in excess of $2 million (at minimum).
- The necessary assets to act as collateral for the loan.
- Healthy cash-flow.
- The ability to be insured at standard rates or better.
Premium financing may not be ideal for certain businesses or HNWIs. Factors such as a rise in interest rates and/or earnings underperformance may cause difficulty for holders of a premium financing policy.
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Premium financing can be an extremely beneficial way for businesses and HNWIs to protect their future without compromising their current financial position. At Blue Herring, we can help your company meet its insurance needs and plan for the future with confidence. We’re experts in this field, and we’ll work closely with you to produce positive outcomes. Contact us here to learn more or to get started today.