An Analysis of Premium Financing

Katt, Peter C.
July 2004
Journal of Financial Planning;Jul2004, Vol. 17 Issue 7, p28
Academic Journal
This article presents an analysis of premium financing, an active marketing concept. Financing permanent life insurance premiums via third-party lenders allegedly is a marketing idea that promises relieving clients of having to pay their life insurance premiums. But whether premium financing makes sense for some clients, an analysis is still required. Typically, targeted clients are buying life insurance associated with their estate planning, and therefore have substantial assets and are probably in their sixties or older. The life insurance policies are almost always owned by irrevocable trusts or similar entities. The marketers of life insurance or clients negotiate financing arrangements with lending institutions. According to some of the major marketers, there are two primary reasons to consider premium financing. First, financing can allow assets to remain invested that might otherwise need to be liquidated to pay premiums, or allow funds that would otherwise go to premium payments to be used for other investments with increased potential. Second, financing can avoid making gifts to trusts. Financing both the premiums and interest charges is not a realistic option because the compounding costs of carrying the loan interest will likely cause the program to go into deficit before life expectancy.


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