Other People’s Money
Premium Financing is when you use the Bank’s money to help fund your own life insurance policy. Why do people do this… well one reason is you could use your money for other investments that will give you a better return while freeing up money that is tied up in paying life insurance premium. Even though you are borrowing from a bank at 3-4% interest rate. Your investments could be returning you 8-12% so you would be losing out on opportunities elsewhere if you didn’t borrow the money. The reason you do it for Life Insurance is because you need the Life Insurance Coverage because you owe money to the bank and other creditors and the policy is used as collateral for the bank.
This concept is not much different than financing a house – you use a mortgage to leverage the assets you have on hand to buy more house than you could afford on your own. Money is borrowed to buy more house, or with premium financing, more life insurance benefits. With premium financing, you are buying a life insurance policy with a larger death benefit, more living benefit protections, and the potential for more cash accumulation without the risk of losses.