When Does Premium Financing Make Sense?

• In many cases, premium financing does not make sense:
  • Insured person has adequate cash flow to pay premiums
  • Insured person does not face difficult choices concerning allocation of discretionary cash flow
• Ideal case for premium financing combines two elements:
  • Long-term need for permanent insurance
  • Short-term or transitional constraints on use of discretionary cash flow
• Risks of premium financing:
  • Accumulation of interest cuts into economic value of death benefit
  • Liquidity may not be available at time of expected loan repayment
  • As always, tax matters deserve special discussion with your accountant or tax advisor.
• Market considerations and trends
  • "Non-recourse premium financing" is defined as financing in which the borrower makes no personal guarantee and posts no collateral (other than the insurance policy being financed) as backing for the Note.  Instead, the lender looks to the policy value alone as collateral.
  • Non-recourse financing minimizes the financial risk of the borrower, but the interest rate charged will be higher than if the borrower gives a personal guarantee.  This is because the lender may face greater risk without such personal backing.  If the borrower is willing to give a recourse note, and/or post financial collateral to back a loan, there is much greater flexibility in choice of insurance companies to make application to.
  • We see great interest and continued activity in non-recourse premium financing.  On the other hand, the lending activity with the greatest growth rate recently has been premium financing backed by personal guarantee and collateralized by the life policy alone.
• Eligibility
  • Non-recourse premium financing is typically limited to seniors (ages 68 and above).
  • Recourse and collateralized lending is not limited by age, but rather by adequacy of financial backing.
  • Prospective borrowers must be informed of their rights under HIPAA, the federal health care privacy statute, and sign releases under that Act.
  • Prospective borrowers must typically give release of their medical records for the purpose of obtaining independent professional estimates of life expectancy.
  • Because of regulatory considerations, we are not able to discuss financing alternatives except with “accredited investors,” as defined under Rule 501 of Regulation D of the federal securities law.   For an individual to be an accredited investor, that person must have net worth of at least $1 million or annual income of at least $200,000 (or joint income with a spouse exceeding $300,000).  See http://www.sec.gov/answers/accred.htm.  Such accredited investors must sign a statement affirming their status as such, of which we can provide a sample.