Premium financed life insurance has distinct advantages in a high-interest rate environment where unpredictable market swings and inflation otherwise wreak havoc on your wallet and portfolio. The last year and a half have seen record inflation decimate the daily living expenses and liquid capital of families across the United States.
In order to avoid a hyper-inflationary spiral, the Federal Reserve has been raising interest rates dramatically from their previous historic lows. Higher interest rates tighten the borrowing market and create challenges of their own. Our money can feel essentially trapped between an inflationary rock and a high-interest hard space. Premium financed life insurance can find safe haven in the narrow space between. Let’s explore that a bit further.
Premium Financed Life Insurance Explained
On the surface, premium financed life insurance can seem complex when in reality, the process is quite straight-forward. The reason people who require large life insurance policies with benefits $5 million or greater would choose a premium financed approach is simple.
Would you rather pay $200,000 dollars a year or just 3% of that to maintain your policy?
I think the answer is obvious. We would all rather keep our cash working for us and still have the policy we need to protect our family’s financial future.
So, how is it possible to pay just 3% of your policy premium each year?
It’s possible because you aren’t the entity paying the premium at all. Instead, you have secured a loan from a lender (a large bank or other financial institution) and the lender is paying the premium. You simply may be paying interest to the bank on the loan.
How is the loan repaid?
When you pass away, the money that is owed on the loan is paid out of the death benefit while your beneficiaries receive the rest.
In today’s economic environment, why is premium financed life insurance a good idea?
Here’s where it gets interesting! In order to secure the loan that pays the insurance policy premiums, the lender requires collateral. The good news is that most lenders are quite flexible in the assets that they will allow to collateralize the loan. For instance, a CD (Certificate of Deposit) can be used to collateralize the loan. Let’s focus on that for a moment.
A Certificate of Deposit is a savings product that differs from a traditional savings account. In a CD, your money will be untouchable for a certain period of time and during that time you will enjoy a higher interest rate return than you typically would on a regular savings account. The good news is that when the Federal Reserve raises interest rates, savings, CDs, and other products are also affected as they see their interest rate returns rise in response.
This means instead of being negatively impacted by rising rates and volatile markets, your money can be stashed in a safe CD (which is insured by the FDIC) and enjoy the increased value at higher rates!
The cash growth of your life insurance policy may grow over time
In addition to collateralizing the loan with high-interest-friendly assets such as CD’s and procuring a large life insurance policy while possibly paying only the interest on the premium loan, the policy itself has the potential to grow in value.
These can be whole life policies and their cash value grows as the market (such as the S&P 500 or other indexed markets) finds its footing again.
This means that even though you are paying the interest on the loan, the asset of the policy itself becomes more valuable.
Tying it all together: The Advantage of Premium Financed Life Insurance
To sum it up, people who meet the requirements for a premium financed life insurance policy can collateralize their loan using instruments that perform better during the current economic conditions of rising interest rates. This alone makes premium financed life insurance worth considering.
When combined with all of the other headwinds our economy is facing today, however, the ability to maintain your liquidity and keep cash in your account or your business while affording the protective insurance you need at a fraction of the cost to your wallet is priceless.
Insurative would be happy to answer any questions you may have about premium financed life insurance policies and any other life insurance-related questions. We are here for you!
You can contact us at 1-877-281-1311