People premium finance is a type of financing that allows business owners to pay for their employees' health insurance premiums over time, rather than paying the full amount upfront.
This can be a huge cost savings for businesses, especially small ones, as it can help reduce their overall expenses and improve their cash flow.
By spreading out the cost of health insurance premiums, businesses can better manage their finances and make more informed decisions about their employees' benefits.
For example, if a business owner owes $10,000 in health insurance premiums, they can pay it off over several months or even years, rather than paying the full amount upfront.
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What Is People Premium Finance?
People Premium Finance is a type of financing option that allows individuals to purchase a vehicle with a lower upfront payment.
It's essentially a way to split the cost of a car into more manageable monthly payments, making it easier to get behind the wheel without breaking the bank.
This type of financing is often used by people who don't have a lot of cash on hand or who want to keep their monthly expenses low.
With People Premium Finance, you can drive away in a new car with a lower down payment and a more affordable monthly payment.
This can be a huge relief for those who need a vehicle for daily use, such as commuters or families with kids.
By spreading the cost over several years, People Premium Finance can make owning a car more accessible and affordable.
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Benefits and Risks
Premium financing can make sense for people who need high-end life insurance, especially those with a high net worth. Some 52% of Americans have a life insurance policy, and for HNWIs, premiums can easily cost $100,000 or more a year.
Taking out a personal loan to pay for high insurance premiums may carry fewer risks than using insurance premium financing. However, premium financing allows people to borrow at a rate close to a benchmark short-term rate to pay for life insurance.
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A $25 million 20-year term life policy, for example, might run about $2,100 a month, and a whole life policy would start closer to $15,000 a month. This can prevent the insured from triggering capital gains taxes because they don't have to liquidate assets to pay for the premium upfront.
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Managing Risks
Interest rate risk can be reduced by putting a cap on how high the interest rate can rise or offering a fixed interest rate. This can provide peace of mind and lower the risks associated with insurance premium financing.
A special death benefit rider can be added to the policy to reduce policy earnings risk. This typically adds to the cost of the policy, but it can help lower the risks associated with insurance premium financing.
The 2017 Tax Cuts and Jobs Act made it no longer possible to deduct the interest from a home-equity loan if the money is used for something other than purchasing, building, or renovating a home. This strategy is no longer as useful for tax savings as in the past.
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To mitigate some of the risks with premium financing, consider the following:
By understanding and managing the risks associated with insurance premium financing, you can make informed decisions and maximize the benefits of this strategy.
Interest Rate Volatility Risk
Interest Rate Volatility Risk is a significant concern in premium financing arrangements. Most lenders tie the interest due on the loan to an index, such as LIBOR or Prime.
This means that if interest rates rise, the total interest charge will rise as well. If the policy owner can't afford to pay interest payments, they stand to lose their insurance and be left with significant debt.
Responsible lenders take this risk into account when doing their financial underwriting. Typical loan rates are pegged to 1 year LIBOR with a competitive spread of ~ 180 basis points.
Most borrowing rates can be anticipated to range from 2.5% to 6%, depending on the fluctuation of 1 year LIBOR plus the fixed spread. This risk can be mitigated by choosing a lender that offers a fixed interest rate or caps the interest rate.
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Qualification and Planning
To qualify for premium financing, you'll need to meet certain criteria, such as being a financially savvy insured person with a high net worth, but with limited liquid assets.
To be eligible, you must also be under the age of 70. This is a key factor, as lenders want to ensure you'll be able to pay off the loan.
A clear insurable interest and financial need are also required, which means you need to have a legitimate reason for taking out the life insurance policy. This could be to cover business expenses, pay off debts, or provide for loved ones.
To qualify for premium financing, you'll typically need to have additional collateral pledged beyond the insurance contract, such as other assets or investments. This provides security for the lender and helps them determine how much to lend you.
To ensure a smooth process, it's often recommended that outside legal or financial counsel are involved. This can provide an added layer of protection and help you make informed decisions.
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To avoid tying up your own capital to pay premiums, a demonstrated exit strategy beyond the death benefit payoff is also necessary. This could involve selling assets, refinancing the loan, or using other means to pay off the debt.
Here are the key qualification criteria summarized:
- Financially savvy insured person with a high net worth but limited liquid assets
- Under age 70
- Clear insurable interest and financial need
- Additional collateral pledged beyond the insurance contract
- Outside legal or financial counsel involved
- Demonstrated exit strategy beyond the death benefit payoff
Qualification Criteria
To qualify for premium financing, lenders look for a financially savvy insured person with a high net worth, but with limited liquid assets.
This means you need to have a certain level of wealth, but not so much that you can easily afford the premiums yourself.
The insured must also be under the age of 70, as this is typically the maximum age for premium financing.
A clear insurable interest and financial need are also required, which means you need to have a reason for purchasing the life insurance policy that's tied to your financial situation.
For example, if you're a business owner and you want to ensure that your business partners or heirs are taken care of in the event of your death.
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To secure a premium financing loan, you'll need to pledge additional collateral beyond the insurance contract itself.
This could include other assets, such as real estate or investments.
It's also recommended to involve outside legal or financial counsel to ensure you're making an informed decision.
A demonstrated exit strategy beyond the death benefit payoff is also required, which means you need to have a plan for how you'll pay off the loan when the policy matures.
Additional reading: Life Insurance to Cover Your Mortgage
Plan Your Business Strategy
Planning a business strategy is crucial for success, and understanding your options is key. Premium financing can be a game-changer for higher net worth individuals and families who want to maintain their assets intact.
This financial strategy involves borrowing funds to pay for life insurance premiums, typically used by those who can afford the insurance but prefer not to liquidate their assets. By leveraging borrowed funds, you can keep more of your assets while still securing life insurance coverage.
Higher net worth individuals and families, life insurance agents and financial advisors, and business owners can all benefit from premium financing. It allows them to maximize wealth transfer, build substantial cash values, and enjoy tax-free or untaxed income for retirement or legacy purposes.
Here are the benefits of premium financing in a nutshell:
- Leverage: Use borrowed funds rather than personal capital to pay premiums.
- Capital Retention: Keep more of your assets while still securing life insurance coverage.
- Wealth Maximization: Enhance wealth transfer and build cash values within the policy.
Indexed Universal Life (IUL) is the preferred policy for premium financing due to its potential for cash value accumulation and flexible benefits.
Managing and Conclusion
Managing premium financing requires careful consideration of various risks.
One way to mitigate interest rate risk is to have a lender put a cap on how high the interest rate can rise.
A fixed interest rate can also eliminate interest rate risk.
Reducing policy earnings risk can be achieved by adding a special death benefit rider.
This typically adds to the cost of the policy, but provides peace of mind.
The 2017 Tax Cuts and Jobs Act made home equity loans less useful for tax savings, as the interest can no longer be deducted if the money is used for something other than purchasing, building, or renovating a home.
In conclusion, managing premium financing involves being aware of potential risks and taking steps to mitigate them.
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