What is Premium Financing and is it for me..?

What is Premium Financing?

Life insurance premium financing involves taking on a 3rd party loan

(Usually with the bank) to pay for a policy's premiums.

Eg: An annuity plan that requires $800,000 single premium payment

Based on your income and credit score, the bank disburses a loan of $ 400,000 and remaining $ 400,000 will be from your cash savings.
In essence, your financing commitment would become the interest to the bank on the $400,000 loan + a small portion (% of the total loan) depending on the financing package and the full $ 400,000 cash you have to payout.

Should i consider Premium Financing?

Pros Of Premium Financing:

Why do some customers opt for premium financing, and is it suited for me?

Premium financing serves as a leverage financing from the bank and may be useful if you fall into the following categories:

If you are a High Net Worth Individual with wealth locked up in other fixed assets or collaterals like properties, leveraging on this financing can help you cover your beneficiaries to provide immediate liquidity for them in times of emergencies.
If you are doing legacy planning with a large sum assured. Leveraging on premium financing would allow you to take on a loan to pay for a portion of your premium, without the need to set aside the full amount for every plan.

Cons of Premium Financing / Risk to note:

Taking on premium financing is like adding a debt instrument which adds a risk in comparison to buying the policy without this financing. Hence, it is useful to understand the risk that comes along with such decision.

Amongst the Pros, we have to note the risk of:

Interest rate rising (To a higher value that we are prepared for)

Premium financing is attractive when the interest rates are low as borrowers believe they can get a higher rate of return from the insurance policy or from other investment products to fund the lower cost of borrowing.
The risk comes from the fact that interest rate can rise and spell trouble when one has insufficient funds to fund the loan, leading to a potential default risk.

2. Qualification risk
(Are you prepared to pay up the loan if there is an early withdrawal?)

Just like how everything comes with criteria to qualify.... its the same for premium financing; ie taking a loan!
In this case, borrowers are typically required to requalify each time loan is renewed (According to the Revised loan collateral and customer loan eligibility). If the value of the collateral falls below a certain treshold, insured may have to provide additional collateral.
Do note that the bank has the right to give or withdraw the loan. If the customer eligibility is compromised, the loan can be taken away even if in-forced. (In cases of Old age/ unemployment/ bankrupcy!)

3. Policy earnings risk

Essentially, The cash surrender value/death benefit of your insurance policy becomes the collateral for the loan and the bank will become the main beneficiary of the policy. The risk comes into place should the value of the collateral here underperforms.

The risk comes along should the cash surrender value underperforms, leading to the loan balance exceeding the collateral value. Here, you as the insured would have to provide more collateral to avoid default.

Soo... financing? Or nah..?

Well, if you've read through the pros and cons listed and still lean towards premium financing to free up your cash, its all up to you! :)

Imma just list down some of the main reminders of taking up a premium financing.

Opting for premium financing would be giving up the policy ownership. The bank now becomes the executor and you would have to get "permission" on any transactions you would like to do. ; ie you transfer your rights. You would not be allowed to appoint beneficiaries, do partial withdrawal of the policy nor take up loan on it.
No policy statement updates to view for ya! Instead of having policy statement sent to you for reference on the policy activity, the recipient of these updates now becomes the bank!
Taking up this loan may affect the future loan you can take up for eg a future house. Premium financing is classified as taking up a loan. This may affect your Total debt servicing ratio (TDSR), which refers to the portion of borrower gross monthly income that goes towards repaying monthly debt obligations, including loan being applied for. So bear in mind that the loan you choose to take up for premium financing would weaken your TDSR as the monthly interest repayment on it would add to your TDSR calculation.

Apart from premium financing.

Alright, so you have gotten to the end of this little write up, still confused?

Well apart from premium financing you may be happy to know.. there are alternatives to leverage and you may still be able to accomplish your goals!

The solution is customisable, so feel free to reach out to @chloeng01 on telegram if you would like to hear more or even share your views!

Cheers to a journey of lifelong learning!! :)

Chloe