Did you know
72% of high net worth individuals choose to premium finance their universal life insurance policies, according to research by Capital for Life.
That’s a huge number.
Financing the premium is a very popular way to buy universal life insurance, so we've put together a guide to help you understand the pros and the cons.
This is the Ultimate Guide to Life Insurance Premium Financing in 2020.
In this comprehensive guide, we’ll cover:
- How does premium financing for life insurance work?
- Benefits of financing a universal life insurance policy
- Advanced premium finance strategies for high net worth clients and life insurance brokers
So if you want to take advantage of premium financing and get more from your life policy, you’ll enjoy this guide.
Let‘s get started.
What is Premium Financing for Life Insurance?
Premium financing is a loan which is used to buy a life insurance policy. The loan is secured against the cash surrender value of the life insurance policy. Loans are offered by third-party lenders like private banks and life insurance finance companies.
Who Uses Premium Finance to Buy Life Insurance?
Premium Financing is a popular strategy for buying life insurance used by high net worth individuals, business owners and entrepreneurs. By financing the majority of the upfront cost of the life insurance policy, high net worth individuals don’t have to cash in, or sell assets to pay the whole cost of life insurance up front.
Most businesses have highly valuable key people who are vital to the company, and without them, it would suffer.
Therefore insuring the lives of key people is one way to protect the business.
Instead of paying the full cost of insuring several key people, a business can use finance to pay for the majority of the cost of insuring the lives of their key people.
Premium financing a policy gives a business the protection it needs while providing the company with a cash flow efficient way to fund the life policies of critical people.
How does Life Insurance Premium Financing Work?
Life insurance premium financing works by allowing you to take a loan to pay for most of the cost, known as the premium, to buy your life policy. Private banks and premium financing life insurance companies offer loans to high net worth individuals. The individual makes a down payment against the policy premium, and the lender pays the balance.
Most premium finance lenders offer:
- Interest-only loans
- Capital repayment at the end of the loan term
At the end of the initial loan period, a lender may provide you with a new credit facility based on the cash surrender value of your life policy.
How Much Can I Borrow Against My Life Insurance Policy?
How much you borrow against your life policy is up to you.
Most private banks will allow you to borrow between 80% and 90% loan to value of the day one cash surrender value of your life policy. But new lenders coming into the market may offer to lend you more money to buy your policy.
It is worth checking the conditions and any restrictions that a premium finance lender places on the loan.
For example, private banks usually require you to open a bank account, give them a personal guarantee for your loan and get you to invest in their wealth management services. The costs of having to take all these additional products can be expensive.
So it’s worth shopping around for your loan.
What are the Benefits of Life Insurance Premium Financing?
Let’s look at our favourite reasons why premium financing a life policy makes sense.
1. The Minimum Method
What is The Minimum Method?
Simply put, it’s using other people’s money to increase the investment returns of your life policy.
The life insurance industry calls it premium financing.
This may sound high risk, but if you’re a homeowner, then chances are you’re already using The Minimum Method by having a mortgage against your home.
Here is the step by step guide showing you exactly why you should use leverage to buy your life policy by financing the premium.
Keep your Cash Invested
Investments like property, shares and bonds have medium to long-term term investment horizons. Selling those assets to buy a life insurance policy often doesn’t make sense. But a high net worth individual doesn’t have to cash in these assets and lose the potential for higher investment returns. They can keep their cash invested and premium finance their life policy instead.
By borrowing the majority of the upfront life insurance premium from a lender, your assets can stay invested and you still get to buy your life insurance policy and the cover it provides.
If the upfront life policy costs $1m, you would typically have to find the $1m to pay for it. But not with premium financing for life insurance.
A $1m premium may only cost you $200,000 (depending upon age, gender, where you live etc)
That means the $800,000 you didn’t spend buying your life policy stays invested and potentially earning higher returns than the cost of the interest you are paying on your premium finance loan.
That’s the benefit of The Minimum Method. You borrow other people’s money to invest in the asset you want, just like you do with your home.
But it gets better.
2. The Leverage Method
What is the Leverage Method?
It’s the same technique that most hedge funds use to make more money, a lot more money.
Does up to five times the growth in your life policy sound too good to be true? Right? Wrong.
By using premium finance, your life insurance policy can achieve this level of return because you are borrowing to invest. You are leveraging.
Leverage is when you borrow money to buy an asset, in this case, a life insurance policy.
The expectation is that the growth in the life policy will be higher than your borrowing costs meaning you will increase your investment returns.
Let’s take a look at an example.
Buying a Life Insurance Policy With Finance
Using our example from earlier, if the life policy you want to buy costs $1m, but you only need to put down 20%, the plan will only cost you $200,000.
But even though you have only put down $200,000, you now have a life insurance policy with an investment value of $1m. You just borrowed the rest of the money.
Now, assuming the $1m invested in your life policy grows by 5% in a year. Your plan will now be worth $1,050,000* giving you investment growth of $50,000.
Now compare this to the investment returns you would have made without premium finance.
Buying a Life Insurance Policy With NO Finance
You would have invested $200,000 in your life policy because you didn’t take The Leverage Method. In other words, you didn't premium finance your plan.
The $200,000 you invested grows by 5% in a year. Your policy will now be worth $210,000* giving you an investment return of $10,000.
[* Please note, this is an example only. It is important to note that you should remember you will have to pay interest costs for the duration of your loan.]
Let’s compare the $10,000 return to the $50,000 return you could make if you premium financed your life policy.
You get a 5x higher investment return with premium finance. That’s the benefit of The Leverage Method.
And it gets better.
3. The Maximiser Model
What is the Maximiser Model?
Maximising the amount of life cover you take is important. The earlier you buy life cover, the cheaper it will be.
Fact | Most households don’t have enough life insurance cover.
But how do you get the life cover you need WITHOUT paying for it all upfront?
Premium financing allows you to buy far higher levels of life cover because you are borrowing the money to pay for most of the upfront cost or premium.
Let’s take a look at an example.
Life Cover With No Premium Finance
With our earlier case, a budget of $200,000 may buy you $600,000 of life cover*. Maybe it’s enough, but perhaps not.
That’s where the Maximiser Model comes in.
Life Cover With Premium Finance
You invest $200,000 and finance the remaining $800,000, giving you total life cover purchasing power of $1m*.
That’s 5x the life cover by financing your premium.
With borrowing, you can afford to buy $3m of life cover (5 x $600,000).
That’s an extra $2.4m of life cover.
That's a massive increase in cover and likely to be closer to what you want, or need, to protect your family or business partners as your wealth grows.
Using the Maximiser Model means you can buy all the life cover you need NOW (whilst you are still young OR not getting any older!)
[*Dependent on several factors including early surrender charges, age, gender, country of residence, smoking status.]
Who Offers Premium Financing for Life Insurance?
Most of the world’s largest private banks offer universal life insurance premium finance.
Here is a list of private banks who are active in premium financing of life insurance policies, which includes the loan values available and other criteria that a bank will want.
Life Insurance Premium Financing Banks
Private Bank and Loan to Value Borrowing for Premium Finance Life Insurance
- UBS 90%
- Deutsche Bank 90%
- Bank of Singapore 85%
- Societe Generale 90%
- Barclays 90%
- Credit Suisse 80%
- Standard Chartered 90%
- DBS Bank 90%
Life Insurance Premium Financing Companies
Instead of using bank finance, you may choose to use a premium finance life insurance lender.
Third-party lenders often provide finance without the need for assets under management or personal guarantees.
Lending rates are typically higher than banks.
Applying for Life Insurance Premium Finance
Get your life insurance broker or wealth manager to help you apply for premium finance.
They should be experienced in how to apply and be able to guide you through the process.
Applying for Life Insurance Premium Finance
Our 10 step guide to applying for life insurance premium financing:
- Make sure you have an offer of life insurance or an in-force policy illustration.
- Check with your bank or lender to see if your life insurance policy can be financed.
- Decide how much you want to borrow.
- Choose which lender you are applying to for a loan.
- Complete your lender's loan application form. Send the completed form and a copy of your insurance offer, or in-force policy illustration, to your lender.
- Take advice from your a financial adviser or a trustee to help you decide how you should buy your policy. Life insurance policies are typically bought by an offshore trust or offshore company which buys the policy on your behalf because of the tax and estate planning advantages available.
- Get your loan approved.
- Tell your lender how you will be buying the policy and get them to work with your trusted adviser to set up the structure you want to use.
- Make the policy premium down payment. Send the advanced interest payments to your lender.
- Your life insurance policy is bought on your behalf by your trustee or corporate services provider. As soon as the first premium is paid and the life insurer acknowledges receipt of your premium, your policy is in force and your life over has started.
How to Decide which Lender to Use for Life Policy Financing
Traditionally, private banks have been the leading premium finance lenders in the offshore life insurance market.
Many, third-party insurance brokers sell life policies to private bank’s high net worth clients. When this happens, it makes sense for banks to lend their own clients the money to buy a policy. Especially because the bank picks up a large part of the insurance agent's sales commission
But times are changing. Choice has arrived.
Specialist premium finance life insurance companies are offering high net worth clients funding for their life policies.
And without the add-ons and tie-ins that banks demand.
Let’s take a look at the differences.
The Premium Finance Life Insurance Market | The Past
The financial crisis of 2008 changed everything. Certainly for bank lending. In the run-up to the crisis, the banks lent billions of US$ to high net worth clients looking to borrow money against their life insurance policies.
But overnight, lending dried up. Financial regulators worldwide have made sure banks cannot lend money so easily. One of the effects has been to make life insurance policy lending more expensive for banks meaning it's become more expensive for customers to borrow.
The Premium Finance Life Insurance Market | Now
Most private banks still offer premium finance, but clients face more restrictions and conditions when they take out a loan.
Banks have reduced the loan to value ratios and tightened borrowing criteria for clients. For example, clients must match the amount they borrow with the same amount of assets invested.
All premium financing must go through a private bank’s credit underwriting team. It will want to see that you have a broader ‘relationship’ with the bank.
But what does this mean? Let’s take a look.
The Cost of Life Insurance Premium Financing
Paying interest on your loan is an obvious cost of universal life insurance premium financing.
But there are other costs you should consider when taking out a loan to fund your life policy.
These costs will depend upon your ‘relationship’ with your bank, and its willingness to lend to you.
Compare this to life insurance premium financing companies. They usually only consider your creditworthiness and the type of life policy you want to finance.
Here’s a list of expenses and terms you should consider when choosing a lender for your life insurance policy.
Premium Finance Arrangement Fee
What is a Premium Finance Arrangement Fee?
It’s an administration charge made by your lender for arranging the premium finance loan against your life insurance policy. All lenders charge an arrangement fee.
Arrangement fees vary between lenders but are usually between 1% and 2% of the amount you are borrowing.
An arrangement fee for a $3,000,000 premium finance loan will cost you $45,000.
The arrangement fee covers the administrative costs of setting up the premium finance facility.
Investment Management Fees
What is an Investment Management Fee?
Private banks charge investment management fees on the total amount of assets they manage for you.
Almost all banks will want you to place assets with them before they give you a premium finance loan.
An investment management fee is usually between 1% and 1.5% of your total assets under management.
For every $2,000,000 invested, you will pay $20,000 to $30,000 per year in fees to the bank.
As well as an investment portfolio, private banks will also require you to hold cash on deposit with them.
What is a Personal Guarantee?
A personal guarantee is your promise to repay the premium finance loan used to buy your life insurance policy.
It means that if you become unable to repay the debt, the lender can legally take possession over other assets to repay your premium finance loan.
Personal guarantees are usually taken by private banks to provide them with an extra level of protection in the event you default on your loan payments.
Trust Company and Offshore Company Fees
What are Trust Company and Offshore Company fees?
A trust company and an offshore company will charge you a set up cost and annual fees to buy and hold your universal life insurance policy.
If you are using a private bank loan for your policy, it will want you to use its trust and offshore company services. While this is common practice, you may not be happy using the private bank’s trust and offshore company service. It is worth shopping around for this service because costs vary enormously.
Premium Financing Companies
Life insurance financing companies are usually more flexible and give you a choice of trust company, or allow you to use an existing trust arrangement.
There are some costs to consider when taking a premium finance loan from a private bank. These costs, as well as your loan terms, should be compared to those of a premium finance company.
For example, an insurance premium finance company does not usually require you to give a personal guarantee. They don’t often ask you to manage assets in return for a loan. You can also decide which trust company to use to buy and hold your policy.
What Types of Life Insurance Premium Finance Loans are Available?
There are different types of life insurance financing loans available – typically variable-rate and fixed-rate credit facilities. The most common type of premium financing loan for life insurance offered is a variable rate loan.
Variable Rate Loan
The variable rate loan has two parts – the margin charged by the lender and the interest rate reference rate.
Bank Reference Rate
The reference rate in premium finance loans is usually a LIBOR linked rate. The most common LIBOR rate for premium financing is one, three and twelve-month LIBOR based on US interest rates – the US LIBOR rate. This part of the price will fluctuate during your loan period.
Interest Rate Margin
The interest rate margin is the additional rate that a finance provider charges on top of the reference rate. It expresses this margin on a premium finance loan as a percentage of your loan value, for example 1.23%. It will fix the interest rate margin for each review period. A private bank review period is usually yearly.
Example of Variable Rate
Get your initial loan cost by taking the reference rate and adding the interest rate margin. For example, 1 month US LIBOR = 0.38% + Interest Margin = 0.85% = 1.23%.
In this example, your initial premium finance loan will cost 1.23%. While your interest rate margin will stay the same, your loan rate will vary in line with the fluctuation in 1 month US LIBOR rates. It is worth noting that lenders can change the margin they charge at each review point of your loan, which is typically every year.
Advantages of a Variable Rate Loan
- Allows you to take advantage of falling rates and pay less interest.
- Early repayment saving money on interest charges.
- Switching premium finance lender should also be easier if you have a variable rate loan.
Disadvantages of a Variable Rate Loan
- Interest rates change on a daily basis meaning you won't know exactly how much you pay each month.
- Interest rates could rise costing you more money.
Fixed-rates are uncommon in the universal life insurance premium financing market.
However, if US interest rates rise, fixed rates are likely to become more popular with high net worth clients looking for certainty over interest costs, especially with current ultra low interest rates.
Advantages of a Fixed Rate Loan
A fixed-rate loan protects you from sudden interest rate rises. A fixed-rate gives you certainty over interest payments and allows for budgeting.
Disadvantages of a Fixed Rate Loan
Fixed-rate loans usually have higher interest rates because you are paying for certainty.
Early repayment penalties usually apply if you want to settle your loan early.
If you decide to premium finance your universal life insurance policy, consider how long you want the loan term to be. You should consider getting a fixed-rate loan if you want certainty over interest payments.
If you prefer flexibility, or interest rates are falling, a variable rate could be more suitable for you.
What Happens at the End of my Loan Term?
The most popular type of premium financing loan is an interest-only loan. You only pay interest for the term of the loan. Consequently, at the end of your loan term, you will have to repay the money you borrowed.
For the most part, lenders will consider giving you a new facility. But it is worth shopping around for a new loan to see if you can get a better deal.
What Happens if I Die while Still Owing Premium Finance on My Life Policy?
If you die while still having a loan, the death benefit of your policy will be used to repay your outstanding premium finance loan.
Once your loan is repaid, the remaining life policy pay-out passes to your beneficiaries in line with your wishes in your estate plan.
It’s worth checking to see if the life insurance payout is enough for your family or business needs after your loan has been paid off. If not, consider taking out a higher amount of life insurance to cover the repayment of your loan.
What Happens If I Stop Paying Interest on my Life Insurance Premium Financing Loan?
Your life insurance policy could be at risk if you stop making interest payments on your loan.
Your lender may cancel your plan. And the policy’s cash value will be used to repay the interest and capital owed.
If your policy ends, your life insurance coverage ends, so it’s important to keep up your interest payments.
If you need help, contact your lender and discuss what options you have.
Can I Refinance My Existing Life Insurance Policy?
Yes, you can refinance your existing universal life insurance policy. To refinance your plan, you’ll need the following:
- Name of your life insurance company
- Type of life insurance plan you have e.g. universal life insurance, whole of life
- Your insurance plan’s current cash value
- Details of any existing premium finance loan
- Repayment terms of your loan including any penalties
Not all private banks are keen to refinance life policies. Generally, you should check at least six months before the end of your loan term.
If your bank does offer you a refinance deal, check the terms and conditions to make sure you’re happy with them. A premium finance company may be able to provide you with a better refinance deal.
Whilst you are considering refinancing, take the time to review your life insurance policy to make sure it’s still suitable for you. If your wealth has grown since you took out your plan, it may be a good time to increase your life cover.
4 Benefits of Refinacing Your Life Insurance Policy
Have you ever thought of refinancing your life insurance policy? Maybe not, but just like a homeowners mortgage, a life policy can be refinanced for a new deal.
Here are four reasons to refinance your universal life policy:
- Secure a better interest rate
- Extend the term of your loan
- Unlock cash value built up in your plan and borrow more funds
- Move to a fixed interest rate offering security of repayment amount
Before refinancing your policy, check to see if there are any early repayment charges on your existing loan.
If you decide to refinance your policy, work with your life insurance agent to make sure things go smoothly. Furthermore, tell your life insurer that you are planning to switch your finance to a new lender.
Letting all parties know that you are refinancing will help the process go more smoothly.
With global interest rates falling rapidly in response to Covid-19, financing life insurance has become very attractive.
One of the other potential outcomes of the Covid-19 virus is that more life insurance will be bought by high net worth individuals, and businesses looking for protection against future outbreaks.
Buying a life insurance policy which offers generous crediting rates, with financing at ultra-low interest rates, premium financing for life insurance will be as popular as ever with high net worth clients.
Want premium finance for your life insurance policy? Capital for Life can help.
Capital for Life has everything a professional adviser needs to offer their high net worth clients international life insurance and premium financing solutions. We provide products, training, advice and end to end service for advisers and clients in nearly 200 countries across Asia, the Middle East, Africa, Europe, Australasia, North and South America. We are an independent company with no conflicts of interest. Try us and see the difference. Contact us email@example.com