What is Premium Financing?
Premium financing is a financial strategy where individuals or businesses use borrowed funds to pay for life insurance premiums. This approach is commonly used for large policies, such as Indexed Universal Life (IUL) or Whole Life Insurance, which can have significant premium costs.
The main objective of premium financing is to preserve liquidity by leveraging available assets as collateral while maintaining life insurance coverage. Typically, the loan covers the annual premium payments, and the insured repays the loan over time or from the policy’s benefits.
This strategy is particularly appealing to high-net-worth individuals who want to protect their estates or businesses without tying up significant cash flow. For example, a business owner might use premium financing to fund a life insurance policy for estate planning, key person insurance, or a buy-sell agreement.
Although premium financing offers benefits, it also involves risks, such as interest rate changes, loan repayment obligations, and potential policy performance issues. Proper evaluation and financial advice are essential before pursuing this strategy.