5 critical rules to responsible premium financing
Premium financing is an important planning strategy that can substantially improve the results of many large life insurance transactions. The use of leverage to minimize client outlay may not only free up dollars for other lucrative business opportunities, but can lower taxes and accordingly reduce the overall cost of purchasing life insurance.
While borrowing premiums has its benefits, it also adds risk to the transaction. It is easy to assume that if paying interest rather than premium saves money, then smaller loan payments must be even better. Nothing could be further from the truth. A healthy balance must be struck between cost efficiency and risk.
At NextPoint, we focus more on risk mitigation than leverage by adhering to the following 5 rules of responsible premium financing:
Use a bank loan structure without prepayment penalties and encourage the client to pay more, not less than the chargeable interest, particularly in the early years when surrender charges are high.
Exit the bank loan as soon as possible to remove the assignment against the policy, free up the cash value of the policy for other purposes, minimize long-term interest rate risk, and release any additional collateral.
Use fixed rate policy loans so that the cost of paying off the bank loan by borrowing from the policy is known in advance.
Monitor the policy every year until the bank loan is paid off to make sure that the net accumulation value (after loan repayment) is on track with projections.
Make adjustments along the way. If the policy is not performing up to par, increase loan payments to compensate.
Premium financing does not have to be dangerous, but does require ongoing administration for years after the initial sale. For more information about SFI, NextPoint's responsible premium financing program, please contact [email protected].