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What is Premium Financing?

If you can’t afford to buy life insurance there could be another way for you to get it-and that is through premium financing. In a premium financing arrangement, you are loaned the annual premium costs and the collateral on the loan is a stake in your life insurance death benefit proceeds.

The Premium Financing Process

The first step to a premium financing relationship is to find a lender. It is important that you find a lender who does not attempt to own your life insurance policy or to be the sole beneficiary. Stranger owned life insurance policies are considered illegal in many states. Instead, find a lender whose process is to set up a trust as owner and beneficiary of your life insurance policy. Then, within the trust documents, you and your lender will spell out how the lender is to be paid back for outstanding loans and interest from your life insurance proceeds and that the remainder of the death benefit is meant for your personal beneficiaries. This is the safest arrangement and ensures that your activity is in compliance with state and local insurance regulations and that the beneficiaries you care about will get the death benefit proceeds you intended for them to receive.

It will be important that the trust own the life insurance policy rather than you or the lender. It is the owner of the policy that is able to make changes to beneficiaries and other details, so the owner must be an impartial and independent entity without an interest in the asset that is the life insurance policy.

Premium financing is not the right choice for everyone. Some loan terms can be very unfair to the borrower and some might carry interest rates that are too high. If you compare life insurance quotes and adjust your death benefit down, you may even find that you can afford a life insurance policy without all the hassle or expense involved in a premium finance loan. No matter what you decide to do, make sure you read the terms of your agreement carefully and, when possible, ask an attorney for assistance.

July 3, 2010

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