Types of Life Insurance Premium Financing
- "Traditional" Recourse Premium Finance - The client enters a fully collateralized loan arrangement with the intention of holding the life insurance policy to maturity. Traditional financing arrangements are generally purchased for estate liquidity needs and offer the most advantageous loan rates, fees, and spreads. The client may have an exit strategy using other assets in the estate. Traditional finance is particularly effective for clients who have a large but illiquid net worth.
- Non-Recourse Premium Finance - Under a non-recourse premium finance arrangement, the borrower is typically a special purpose vehicle ("SPV") like an Irrevocable Life Insurance Trust ("ILIT") or a Limited Liability Company ("LLC") in the case of off balance sheet corporate financing. When a non-recourse loan is used, there is generally no recourse, or liability, to the underlying insured or their estate. The policy is generally the only collateral. In the event that the premium finance loan is not re-paid at loan maturity, the lender will foreclose on the policy, assume ownership of the policy, collapse the policy and/or collect the death benefit when the insured dies. Non-recourse transactions may pose hidden tax and liability risks to the insured.
- Hybrid - Partial recourse financing that is generally designed for a short time horizon (2–5 years). Typically, the client is required to refinance the loan at the end of the loan term into a longer term recourse loan.
- It is important to have an attorney, familiar with premium finance transactions, review any and all documentation surrounding a recourse, non-recourse or hybrid loan. There can be substantial upfront fees, and unusually high interest rates. Any upfront inducements offered to an insured to enter into a premium finance transaction should be viewed as illegal and individual insurance laws should be carefully reviewed (although many states allow insurance agents to rebate a portion of their commission as long as they rebate the same percentage of their commission to all of their clients).
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