Premium Financing Considerations

Premium Financing is a leveraging technique primarily used by high-net-worth individuals needing substantial life insurance coverage but would like to acquire coverage without giving up the current use of assets invested in their business or portfolio.

We believe that premium financing works in the right situation, but clients need to be aware of all the variables and the impact that potential changes in these variables may have on premium financing arrangements.

Net worth: Each program has a minimum net worth requirement which can be as low as $1 million or higher than $25 million.

Financial documentation: Lenders will request verification of financial net worth from multiple sources. At minimum, current tax returns and financial statements will be required.

Origination fees: Some programs will charge an origination fee for establishing the loan. This can be a flat fee or a percentage of the total loan amount. In many situations the origination fee can be added to the loan balance.

Loan term: Most premium finance programs offer a loan term between one and 10 years. Often, the borrower will be allowed to re-qualify for the loan at the end of the term and establish a new loan with new terms.

Interest rate: Premium finance programs most often use a benchmark rate plus a loan spread. While Prime and LIBOR have been used, SOFR is now considered the preferred benchmark. The loan spread varies from lender to lender but typically falls between 1.5% and 4.0%.

Prepayment penalties: Some programs will charge the borrower a penalty fee if the loan is repaid prior to the end of the term.

Collateral requirement: The primary collateral for the loan is almost always the cash surrender value of the policy. Additional collateral is usually required and must be in a form acceptable to the lender.

Exit strategy: When entering into a premium finance arrangement, there must be a definitive plan on when and how the loan will be repaid. While it is possible that death will occur prior to the planned repayment, death cannot be the planned exit strategy.

We welcome any questions or opportunities to assist you or your clients in achieving identified goals. We take pride in serving a select number of families, businesses, and charitable institutions each year, and we look forward to hearing from you.