Benefits and Risks of Life Insurance Premium Finance

Life Insurance Premium finance is the safer way of purchasing life insurance, especially for high net worth individuals. It allows a company to borrow the cost of life insurance premiums. It usually occurs when the company has a very high premium that makes it necessary to borrow the amount in part or in whole to prevent reducing the company’s liquidity.

More often than not, traditional lenders don’t provide premium financing, and business owners need to look for specific premium financing providers to secure the loan.

Benefits of Premium Finance

When a company releases a large amount of payment, its owner must first consider whether the funds are needed for the daily operation of the company or for the expansion of the business. And in order to prevent liquidating some of the company’s assets or using key funds, financing is required.

More often than not, businesses depend on some type of loan to be sustainable. Premium financing is often a part of the debt cycle for company with high corporate owned life insurance costs.

A business owner can finance multiple policies via a single agreement that allows the owner to make a single insurance premium payment a month. In most cases, insurance companies accept premium financing and accept payment straight from the finance provider. When that is the case, the premium finance company will bill the business owner instead of the insurer.

Premium Financing of Non-Qualified Executive Bonus Plans

Premium financing can be used on non-qualified executive bonus plans, which are available for vital employees of any type of corporation. The employer has the discretion to select the workers to cover and the amount of the bonus. The business owner pays for the premiums on the policy, and the employee has to pay tax that’s equal to the premium amount.

Financing of 770 Accounts

A 770 account is a permanent life insurance policy that has been structured to maximize its cash value. By maximizing the total death benefit and cash value, you can maximize the cash value of the life insurance policy. More often than not, the cash value is tax-free and can be accessed at anytime.

770 accounts have a very competitive rate of return and can be used as collateral. But the premiums can be high. High net individuals or business owners can resort to financing in order to keep up with the premium payments without the need to liquefy assets.

As you can see, financing life insurance premiums can help individuals and companies that need to pay large amounts of premium. It allows them to stay liquid while providing insurance coverage to oneself or one’s employees. This is ideal for corporate owned life insurance programs as well as private banked owned life insurance policies.


FHA Mortgage Insurance Premium

FHA home loans are just that because you pay an FHA Mortgage Insurance Premium (MIP) to the Federal Housing Authority to insure the lender against loses they would take in the event that you defaulted on your promise to pay the loan back as dictated in the promissory note.

As of October 4th, 2010 changes are taken place regarding the FHA mortgage insurance premium and it will affect your monthly payment.

First lets start with a little education. If it were not for private mortgage insurance, VA or FHA, all traditional type of loans would require a minimum down payment of 20%. There are essentially four criteria a lender will look at in order to make a decision on whether or not to loan you money.

1. Your ability to pay – This is why they check your income sources and the likelihood of a continued stream of income.
2. Your willingness to pay – This is why they check your credit, to see if you pay your obligation on time and as agreed.
3. The collateral – This is why a lender will request an appraisal and in some cases an external home inspection. They want to ensure that they are basing their loan amount on the proper true value of the property.
4. The risk – How much risk do you burden and now much risk does the lender carry. This is where the down payment comes into play.

Let’s discuss the risk factor. The assumption is that the more “skin you have in the game” or, the more of your own money that is tied up in this property the more likely you are to do whatever it takes to make the payment so that the lender does not foreclose on the property.

This makes sense. Its one thing to have your life and all your belongings tied up in the house you live in but you add a whole new element if you have put $40,000 of your own money into the purchase of the home.

This is also why down payment requirements and interest rates are much higher for investment properties. If you were to lose your income and were faced with a decision, make my home payment or make my renters house payment it would probably take you a nanosecond to come to the right decision.

Not too long ago a 50% down payment was the going rate. With a strong US economy lenders slowly gravitated to a 20% down payment requirement. Simply put, lenders were comfortable knowing you would do whatever you needed to do to save your house and money.

However, the US Government has a strong initiative to prop up the housing industry and encourage home ownership. On top of that, simple statistics came into play and smart entrepreneurs put the numbers together to come up with yet another profitable insurance opportunity.

They figured, by spreading the risk among many, they could cover the down payment requirements, take the hit on the few, and make a nice profit.

Of course, the insurance companies did not want to have to come up with the 20% down payment, they would rather continue to have their money working and earning interest. The proposal was simple; if the lenders were willing to loan up to 95% the insurance company would cover the 15% if the lender were forced to repo the home (foreclosure).

This seemed like a win-win for the lenders, they could surely sell the home quickly at 80% of its value to remove it from the books. The insurance companies would win knowing that the foreclosure rate would be somewhere around 3%, the many would cover the few through monthly premiums.

And thus, Private Mortgage Insurance was born (PMI).

That is a very simple overview of how it works. If you were to apply for a traditional home loan (conventional financing) and put only 5% down you would be required to pay PMI to cover the lenders risk.

Because this is private the rates vary but you could expect to pay.85% annually of the loan amount prorated monthly. For example; on a $200,000 loan you would add about $141 to your monthly payment.

The more money you put down the lower this monthly rate would be. And, if your property appreciated in value, coupled with loan principal reduction, you could ask the premium to be lowered (of course you would have to pay for an appraisal to lower this monthly payment slightly, not worth it most of the time).

When using conventional financing there is no upfront payment only monthly.

Now, seeing this business model as one that would work, the Government saw a great opportunity to jump in and spring the home ownership initiative in fast forward.

So essentially, FHA home loans were born. They work in the much of the same manner as the private sector.

There are two major exceptions:

1. Because FHA is taking most of the risk they get to dictate the guidelines in which a borrower can be approved.
2. FHA charges an Up Front premium as well as a monthly premium. AND, the upfront portion can be financed into the loan amount.

So here is the skinny. In my opinion FHA home loans are the absolute best option for most first time home buyers. But it comes with a price (as all loans do).

As of October 4th, 2010 to borrow money from a lender insured by the FHA you will be required to pay…

A 1% Up Front mortgage insurance premium that can be added to the loan amount.

.9% or 90 basis points annually prorated for a monthly premium.

Example: The home you want to make an offer on has been negotiated to cost you $200,000. You are using FHA so you can keep your down payment requirement to the low 3.5% (10% if your credit score is between 500 – 570. Good luck getting any conventional financing with those scores).

* Down Payment – $7,000
* Loan Amount – $193,000
* Upfront MIP – $1,930
* New Loan Amount – $194,930
* Annual MIP – $1,754.37
* Prorated monthly – $146.20

The figure above that is most important to you is the $146.20 added to your payment each month. So when qualifying for a loan this must be added but you cannot add it until you know the loan amount (the chicken or the egg).

Yes, mortgage insurance can be expensive and is more expensive with FHA financing but look at the trade-offs. The big one is your low down payment requirement with FHA home loans. This allows you to keep more money in your pocket to help with moving expenses, furnishings or better yet, letting that money continue to earn interest.


Major Factors That Affect Insurance Premium

1. DMV Records:

Ticket history and past involvement in accidents are major elements. Annual mileage also helps determine the likelihood of road accidents. The logical explanation is that the more time a car spends on the road increases the risk of incidents and the other way around. Clean records with no violation and incident-free experience indicate that the policyholder is a low-risk driver who deserves affordable premium.

2. Car Model:

The cost to repair and replace policyholder’s car in case of accident comes into play as well. Insurance Information Institute suggests that the likelihood of theft is also an important factor. For example, a brand new Lamborghini which costs more than $200,000 demands more expensive financial protection than a $20,000 Toyota. Replacement parts for the former are nowhere near affordable range, so insurance company needs to ask for a higher premium. Criminals tend to target more expensive car, too.

3. Age, Address, and Occupation:

Auto insurance companies look for relevant personal information about the driver to make the quote. Young or teenage drivers have very little experience on the road, while senior drivers have a visual impairment; both of them show signs of higher risk. At the same time, a neighborhood where crime rate is quite high relates to the likelihood of theft and vandalism. Some insurers relate occupations with the possibility of accidents. Stressful jobs such as public relation officers and real estate agents can be the factors that increase premium rate.

4. Credit Score:

Many insurers still use applicants’ credit score information to determine approval and price. A person with bad credit score tends to lapse payment due to financial difficulties. Because carrier needs assurance, the policyholder must pay more to cover the possibility of skipping payment.

5. Coverage:

In addition to states’ minimum liability requirements, there are optional coverage options. Every auto insurance company has different prices for optional purchases such as Collision, Comprehensive, Rental Reimbursement, and Roadside Assistant. Policyholders can choose not to buy them to lower premium.

Age is the only personal factor that is impossible to control. Address and occupations are not ones that policyholders can change as they like either. DMV records and credit score are always open for improvement, and at some points, they can help to save money on auto insurance. When a vehicle comes to owners through lease or finance company, the optional coverage of collision and comprehensive often become mandatory. However, higher deductible allows for more affordable premium, hence manageable expense. It is worth to compare premium prices from multiple providers and consult an independent to get the best price for the most appropriate and complete financial protection.

How to Get More Affordable Insurance

There is no way to change age, and it is almost impossible to change address and occupations in an instant. In the auto insurance industry, cheaper is not always better, but it does not hurt to shop around and find the best deal available. Companies change prices all the time to attract potential customers; policyholders can do a little comparison before every renewal and switch in case the price difference is profound that it is worth the hassle to file a new application. Apart from that, there are some other effective methods to lower insurance premium at ease. Sometimes policyholders must consider all the options and make changes to habits/style to get the best deal.

PAYG (Pay-As-You-Go) Insurance

This is like a reward program that gives benefits only to safe or low-risk drivers. As soon as the insurance policy takes effect, the insurer monitors car usage such as mileage, average speed, sudden braking, and overall obedience to traffic laws. Drivers who demonstrate improvements over the last policy period deserve discounts for the next renewal. A teenager or first-time policyholder should pay more for premiums because the lack of experience, but PAYG gives the chance for them to showcase their low-risk behavior on the road to get the benefit.

Premium can change in every renewal, which means it can become higher when drivers receive traffic tickets for any reason. Some insurers that offer PAYG require policyholders to install tracker device so the company can monitor the vehicle at all times. For policyholders, such methods can be too intrusive to privacy. In California, tracker device only monitors mileage but not how policyholders drive their cars.

Defensive Driver

It never hurts to practice defensive-drive attitude on the roads. Drive safe and avoid involvement in accidents or traffic violations. There is no need to go faster than the speed limit or ignore the red light. Claim-free history often comes with premium price reduction. Also, safe, calm drive habit helps with fuel economy.

Low Cost of Ownership

Cost of ownership is different from the price of car. After the purchase price, owner has to calculate depreciation, interests (if the car comes from a lease or finance company), taxes, maintenance, and insurance premium. A vehicle with lower cost of ownership comes with lower premium as well. The best thing to do is to consult an insurer’s representative about how car choice affects coverage price because this gives the chance to manage expense for many months to come. An independent agent will be glad to provide assistance in the calculation.