Financing Life Insurance

What You Need to Know

Much ink has been devoted to the topic of Premium Financing of late as any reader of either the New York Times, The Wall Street Journal, or the Robb Report can attest. Perhaps it is from reading one of these articles that your interest was piqued.

Imagine that you are 70 years old, in reasonably good health, and you have a net worth of around 10 million, give or take.

The probability that you might think about buying a permanent life insurance policy at this point in your life is probably fairly low. Figure that the premiums would be roughly $50,000 a year for every $1,000,000 of coverage.

So to buy as much as your insurability will allow based on your net worth, you might expect to pay $500,000 every year in premiums. Even for someone with a high net worth, this is would be a significant drain on income and assets.

For this reason, you will probably pass on getting life insurance.

If this happens to describe you, then Premium Financing might be an ideal solution. If life insurance wasn't something you were going to get anyway, then it certainly wouldn't hurt if someone else was paying for it.

You could even use your insurability as a way to generate extra income without much risk or out of pocket expense. There are many high net worth individuals who have done this and have been very pleased. T. Boone Pickens is but one example.

Premium Financing is a very new industry, and as such, is more or less a child of the life settlement industry. The difference between the two is that with Premium Financing, the insured becomes insured with the intent to later profit by selling the life insurance on the secondary market.

Such an intent, presumably, did not originally exist for those who may have had a policy for over 10 years and come to realize that life insurance policies themselves can have value in the life settlement market and at some point decide to exercise that option.

Because a great deal of planning and effort must go in to structuring a premium finance case, most brokers look for people between the ages of 67 to around 80.

This is the typical range which may vary 5 years either way with different players involved in the industry. Net worth requirements start at at least 2-5 mil. Needless to say, applicants must typically be above average in health for their age.

Once insurability and financials are verified, the next step is to apply for the policy. After this step is completed, it is time to find a lender, and around the same time something set up something called an Irrevocable Life Insurance Trust, or ILIT.

ILIT is an acronym which stands for Irrevocable Life Insurance Trust.  An ILIT is usually established for those who are approved for Premium Financing, and it is the ILIT which is made the beneficiary of the life insurance policy.

After the ILIT, is established, it is to this ILIT to which the benefits are paid.

You might be interested in reading these PDF reports. Just download them to your desktop and open them with your browser or Adobe Acrobat Reader.

• Graphic from The New York Times
• Robb Report Article on Premium Financing
• USA Today Article About Premium Financing