Are you thinking of purchasing a life insurance plan that requires a large single premium to be paid upfront? You may be offered something called premium financing.
Often positioned as a way for you to enjoy the returns from your life insurance policy while boosting your cash flow, premium financing is when you are offered a loan to pay for your insurance premiums. However, premium financing does have its risks and may not be for everyone.
Read on to find out what exactly premium financing is, how it works, the benefits and disadvantages involved, and whether this is something you should consider.
What is premium financing and how does it work
Premium financing is a type of loan that is offered by financial institutions to help you finance your insurance policy.
It might be relevant if you are purchasing an insurance plan that comes with a large sum assured, such as annuities for retirement income or universal life plans for legacy planning purposes. Premium financing is usually offered when the premiums involved are sizable, such as when it is in the seven-figure range.
With premium financing, you can take out a loan to pay for a portion of your premiums. The remainder will then have to be paid using other means. Here’s an illustration of how premium financing might work for an annuity plan that requires a S$700,000 single premium payment.
Based on your credit score and income, the bank disburses a loan of S$500,000 and the remaining S$200,000 will have to be paid with your cash savings. The cash surrender value of your insurance policy becomes the collateral for the loan and the bank will become the main beneficiary of the policy.
In most cases, you will have to pay off the monthly interest of the loan until the policy has been surrendered or paid out. However, some financial institutions may offer you a premium financing plan that includes repayment of principal and interest, which is a better option as it reduces your outstanding principal over time.
With this principal and payment repayment option, you will be reducing your liability with the bank, which allows you to better safeguard the cash value of your policy. This option works especially well during a low interest rate environment, as a greater portion of your repayments goes into reducing the outstanding principal. However, it usually involves higher monthly repayments and is subject to the bank’s approval.
For premium financing to be a viable option, the payouts you receive from your insurance policy should be higher than what you have to repay your bank over time.
Should I consider premium financing?
Premium financing allows you to maximise the returns on your insurance policy when planned properly. However, it may not be suitable for everyone. Here are the pros and cons of premium financing and things you should consider before getting it.
Need help? Speak to our team of Wealth Management experts to find out if premium financing is suitable for you, and if not, what are the alternative ways to help you meet your financial goals.
