The process toward obtaining a premium financed life insurance policy involves 3 entities: The individual (may also be a family trust or business entity), a life insurance company, and a lender.
- The individual applies for a life insurance policy such as Indexed Universal or Whole Life insurance policy through their insurance agent.
- If the individual is approved for the policy, they then work in coordination with a premium finance company to secure a loan from a lender to cover the premium cost of the policy. Collateral will be required by the lender to complete the loan process.
- With the policy and loan in place, premiums are paid by the lender to the insurance carrier.
- The interest from the loan may be paid by the individual to the lender. In some cases, it might be possible that cash accumulated in the policy can be used to pay the interest on the loan.
- At the end of the loan term, the balance of the loan can be paid to the 3rd party lender from the cash surrender value of the life insurance policy. The remainder of the death benefit will be distributed to the beneficiaries (heirs, charities, etc) of the policy.
There are some considerations to take into account when obtaining a premium financed life insurance policy. For instance, the length of the policy may be greater than the term of the loan. A premium financed loan may come due between 3 and 5 years requiring the policy owner to refinance the policy and renew or update the loan at the end of the term.
The original loan is often used to increase cash premium payments in order to maximize the cash growth potential of the policy, especially during the first several years of the policy. In an Indexed Universal policy, for example, this will allow the largest possible base amount for the policy to begin funding itself if the market index is favorable.