Premium Finance Company? Here’s How to Find the Best One

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Paul Sundin, CPA

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People with large estates can benefit from premium finance. The goal is to limit estate tax exposure and create financial liquidity. But how do you find a good premium finance company?

Companies will utilize several different strategies, depending on the client’s situation. In this post, we will address what you should be looking for in a premium finance company. Let’s dive right in!

​Premium Finance Basics

​The primary goal of premium financing is to have a life insurance policy (or multiple different policies) that will provide tax-free funds to your heirs and eliminate the insurance proceeds from your taxable estate. 

With a premium financing strategy, a client can create an insurance trust and have the trust borrow funds from a lender or commercial bank. Accordingly, lender funds are used to pay the annual insurance premium.

Under this proposed strategy, the client will often only pay the loan interest. Moreover, this allows the client to have a sizable insurance policy and eliminate assets from the estate. 

Premium finance involves many different players. This includes the insurance company, the agent and usually the financial advisor. Consequently, careful coordination is required.

Working with a Commercial Premium Finance Company

​Premium finance companies often work with insurance agencies and clients to provide financing for various commercial and personal insurance lines. As noted, premium finance company rates are typically less than those at traditional banks. They allow clients to use the asset of the insurance policy to become a basis for the loan collateralization.

The insurance policy is collateral. As such, the premium financing allows clients to leverage their assets for estate planning and other liquidity needs.

The client pays for the insurance over an agreed-upon period. You can spread the premiums over many years. As a result, the client can budget for the payments consistent with their cash flow requirements.

Premium financing companies can be a cost-effective and flexible credit option. As such, this will typically have no origination fees and fixed rates for the loan term. In addition, most policies have no pre-payment penalty.

Premium finance companies have various payment options. Accordingly, this will depend on the policy type and underwriting guidelines. Consequently, the payment plans can be from annual installments or equal monthly installments.

Regular payment dates are monthly or annually based on the insurance policy’s effective date. However, a premium finance company could adjust the payment date to tie directly to the client’s cash flow needs and requirements.

Premium Finance Example​

Let’s examine one client’s premium financing structure:

  • Obtained a loan from a specific lender. 
  • The lender paid annual policy premiums to the life insurance company for ten years. 
  • As such, the client paid the lender annual interest out-of-pocket. 
  • With a nonguaranteed rate of return, there will potentially be sufficient cash value in the life insurance policy to pay back the loan. As such, the client can maintain the policy for his remaining life. 
  • The policy gave him tax-deferred growth along with downside protection.
  • Lastly, he used liquid assets to continue investing in his business and received life insurance protection with little out-of-pocket costs.

Using a Trust for Premium Financing

​​While there are sizable estate tax benefits of premium financing, each person’s financial and estate needs are different. But the ideal situation will require a trust. The goal is to eliminate the insurance proceeds from the client’s estate. An estate attorney will structure the trust. But don’t forget to include the client’s CPA in any discussions.  

​A qualified attorney and estate planner should establish the trust. In addition, the trust should not be revocable. The goal is not to limit probate, but to reduce any estate tax liability.

Trusts come in all shapes. As such, the attorney becomes a critical player in the process.

How to Find a Good Premium Finance Company?

Here are a few things to consider when looking for a premium finance company.

  1. Make sure the lender has experience with premium financing.

    The lender’s experience is critical. Moreover, funds will be borrowed from a bank or other lender to fund the required life insurance premiums. As such, the lender will make the premium payments to the insurance carrier.

  2. Coordinate the issuance of the correct insurance rider.

    An insurance rider is added that provides high upfront cash value from the policy that is used as collateral for a portion of the loan.

  3. Determine the lender’s requirements.

    Difference lenders will have different requirements. In some situations, a client might not want to be faced with stringent requirements.

  4. Analyze proper insurance policy

    As you are aware, the goal is to have a policy that will build substantial cash surrender value in the early years. As a result, the client can build the insurance asset that will provide added collateral for the policy.

  5. Communicate with estate planning CPA and attorney

    The death benefit is paid to the beneficiary or the lender if the loan has not been repaid upon the insured’s death. Don’t under estimate the time required. As such, make sure you start the process well in advance.

Final Thoughts

Premium financing offers competitive rates for companies of all sizes and in a variety of industries. As a result, premium payments can be made over a specified time.

The client has cash flow control and capital is freed up other business needs. Consequently, the client becomes comfortable that the structure will work as intended.

In conclusion, insurance companies can benefit by providing a valuable policy to the client. In addition, clients benefit with large estate tax benefits. If structured correctly, the policy will accomplish any goals and result in a happy client.

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Gilbert, AZ