The Weekly Scenario: Financing Life Insurance

Question:  I don’t have a lot of cash for life insurance. Is there any way for me to finance the purchase?

Answer:  Over the last decade, insurance agents and other advisors with their clients have tried to find various ways to borrow money to buy life insurance. The focus was mainly on clients who needed insurance for liquidity and estate taxes but did not currently have the cash for the premium payment.

The client would borrow money and use the borrowed funds to purchase life insurance. The idea was that when the client became more liquid (oftentimes through the sale of an asset like a business or real estate) the loan would be repaid and the client would take over the premium payments from their own cash reserves.

So-called, “premium financing” has significant benefits because it allows a client to bridge a period of time when they are simply not able to pay premiums due to illiquidity constraints.

Comment:  Unfortunately, some took this concept a bit to far. With ‘stranger-owned’ life insurance or STOLI, a client would pledge their life expectancy to others in exchange for a cash payment today. All of the life insurance was purchased with borrowed funds and the loan was to be repaid by selling the insurance in a life settlement. The proceeds would then be used to pay off the loan. For the most part, insurance companies consider this to be a violation of certain rules related to the insurable interest.