It is said that everyone loves life insurance, but nobody loves the premiums. But what if we could limit your out-of-pocket cost and not affect your current cash flow or other invested assets? Premium Financing does precisely that. A lender loans money to you at a factor tied to your income and net worth. The lender holds the policy as collateral until such time as the policy has accumulated enough cash to repay the loan with a series of carefully structured withdrawals or will be repaid by the death proceeds should any remaining loan balance be outstanding. Additional cash can be loaned out at a later time on a tax free basis to be utilized as additional income.
In order for this to work, the policy must be expertly designed so when the loan is repaid the policy stays in force without additional contributions.
With conservative design, after a period of time, the accumulated cash is generally enough to repay the loan and keep the policy in force until 100. The policy owner may request a withdrawal from the policy to repay the loan. The bank then releases the collateral and the individual owns the policy free and clear.
Why does this work? Loan rates on premium financing arrangements are tied to base indexes like LIBOR and are far less expensive than traditional financing rates for other loans. The difference between the interest on the loan and the crediting rate on the indexed universal life policy creates an arbitrage that works in your favor.