The risks of life insurance premium financing are diverse, covering personal and policy-specific concerns, as well as lender-related issues. This approach, while advantageous for some, does require careful thought about potential drawbacks.
We know how essential it is to plan for the future—and life insurance plays a key role. Life insurance premium financing can be a unique way to secure large coverage without selling off assets, though it involves some risks worth considering.
Our life insurance premium financing scam lawyers are here to help you understand these risks and guide you in making informed decisions. We’re committed to providing clear and supportive advice as you consider your financial planning options.
Is Life Insurance Premium Financing Right for You?
Our life insurance investment scam lawyers often work with clients considering premium financing to secure substantial life insurance coverage while preserving other investments. This approach can help certain high-net-worth individuals manage large policies intended to cover business or estate needs in certain limited circumstances but there are incredible risks and these products are not right for a lot of different people. .
While basic life insurance policies can be affordable, high-value whole-life policies can cost over $100,000 annually. The concept behind financing allows clients, in theory anyway, to handle these payments gradually, keeping their savings available for other investments.
An investment fraud lawyer can provide insight into potential risks with premium financing. Borrowing for insurance costs can help avoid asset liquidation and capital gains taxes, though it’s important to proceed carefully to avoid financial setbacks.
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Life Insurance Premium Financing Risks to Consider
When exploring life insurance premium financing, it’s important to recognize that this approach involves several potential risks. Understanding these factors can help you make a more informed decision and prepare for the financial commitments involved.
Below are some key areas to consider before moving forward with premium financing.
Personal Risk
A change in personal financial circumstances could impact eligibility, as banks assess income, net worth, and collateral annually. It’s important to consider these reviews, as they affect ongoing qualification for financing.
Net Worth
For many carriers, the insured’s or guarantor’s net worth must meet a minimum of $5 million, with most successful applicants typically having $25 million or more.
Liquidity
Liquidity reflects a client’s ability to provide collateral and pay off the loan if needed. Generally, banks favor clients with higher liquidity, even if they have substantial net worth, as it ensures easier access to funds.
Collateral
If a collateral shortfall arises, it’s essential to have assets available to secure it. Posted collateral could be at risk if the loan isn’t repaid or refinanced, so careful planning is essential.
Policy and Loan Risks
It’s important to be aware of the significant risks tied to both the loan and the policy itself. These factors can influence the long-term success of the plan and may require careful planning to address potential changes or challenges.
Policy Performance and Interest Rates
A life insurance policy’s performance may not always meet expectations, which can lead to a lower cash value than planned. What happens if this occurs or if interest rates rise? Shifts in interest rates can affect policy projections, sometimes increasing policy performance when rates go up.
However, if interest rates rise too much, the loan balance might exceed the collateral value, potentially requiring more collateral to keep the policy active.
Lender and Renewal Risks
It’s also important to consider the lender’s stability. Only specific banks offer these loans, so selecting a reliable institution familiar with premium financing is key.
Additionally, if the policy doesn’t perform as well as the loan, the lender may call for more collateral—or even call the loan—creating unexpected obligations.
Systematic and Unsystematic Risks
In premium financing, both systematic and unsystematic risks play a role in the overall effectiveness of the strategy. Being aware of these risks can help you approach the process with a clearer understanding of potential market influences and specific factors tied to individual choices.
Systematic Risks
Systematic risk, also known as “market risk” or “volatility,” is the inherent risk that impacts the entire market—it affects the overall market rather than a specific stock or industry and cannot be fully avoided.
In premium financing, the growth of the policy often relies on underlying investments in equity or bond-based indices, which carry this type of risk. Systematic risk reflects how all these factors work together within the market.
Unsystematic Risks
Unsystematic risk, or “specific risk,” can be reduced through diversification. This involves choosing a mix of life insurance carriers, policy types, lenders, and advisers.
For instance, consider whether your adviser has a business succession plan to provide ongoing support for your policy over time.
Reducing Risks in Premium Financing
There are ways to manage some risks tied to premium financing, like a fixed interest rate or a cap on rate increases. Adding a death benefit rider may also protect policy earnings, though these choices can raise policy costs slightly. But, overall, these products are not appropriate in most circumstances, in our view.
In the past, some financial experts recommended using a home equity loan to pay for large life insurance premiums. This approach was popular because it allowed for interest deductions, providing some tax benefits.
However, the 2017 Tax Cuts and Jobs Act changed these deductions. Now, interest on home equity loans is only deductible if used directly for purchasing, building, or improving a home, making this method less effective for those seeking tax savings.
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Why Choose Meyer Wilson for Life Insurance Premium Financing Guidance?
At Meyer Wilson, we understand that life insurance premium financing carries unique financial risks. Working with an experienced life insurance premium financing scam lawyer can help you identify potential issues and protect your interests.
With over 75 years of combined experience, our team is here to guide you through this process, offering the insights you need to make informed financial decisions.
If you’re considering life insurance premium financing, reach out to Meyer Wilson to discuss how we can help you understand the risks involved.
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