Premium Financing: Risks
Is premium financing too good to be true?
No matter how risk averse you may be, if you are aware of it, know how to handle it, and have allies who can support you, you’ll be more inclined to make an educated decision about the level of risk you are willing to undertake. This is the situation we seek to provide to all of our clients at RSB Life.
Premium financing is wonderful. It can provide substantial returns and secure your future in a way that no other strategy can. However, it does come with a set of risks and it is extremely important to us that you are aware of and thoroughly understand them. We need you to have considered the risks before you decide to move forward with us. That is why we are going to take some time to outline the main risks surrounding a premium financed strategy to purchase life insurance.
The Risks of Premium Financing
The following are the most common risks that accompany any premium financing strategy. There may be other risks depending on your unique situation, but that is why we always take our time when helping potential clients figure out if this will ultimately be the most beneficial way to procure a large death benefit to protect their heirs. We want you to feel confident and in-the-know.
- Policy Lapse Risk – The whole point of this strategy is getting you a life insurance policy that will last your entire lifetime. We turn to established insurance companies that will fulfill their promises, but if for any reason the policy doesn’t perform as it was projected, additional premiums and loans may be required.
- Gift Task Risk – There are taxes levied when one gifts, which can turn inheritances into burdens. Life insurance is designed to prevent that. We’ve built a system that makes it so you don’t have to give over the whole amount. Instead, you gift the interest to an irrevocable life insurance trust which helps you avoid running out of your lifetime exclusion.
- Interest Rate Risk – Premium financing works when your life insurance policy accumulates cash value at a projected rate greater than the interest rate on the procured loan. We only use fixed interest rate loans to avoid rates spiking and affecting the performance of the strategy.
- Carrier Risk – You need to be able to trust the insurance company to actually keep your policy going as long as they have promised. You don’t want the policy you’ve paid into to lapse, and neither do we. As such, we only use highly-rated insurance companies with the ability to keep their promises.
- Collateral Risk – For the first three to five years of your premium financing strategy, the cash value of your chosen life insurance policy will be lower than the value of your loan. This is normal. While we expect your life insurance policy cash values to surpass the loan amount, there can be the risk that collateral values decrease, which will require you to push more collateral into the account to make up for the losses.
Navigate the Risks with RSB Life
We are always cognizant of the risks that may occur with premium financing strategies but we make sure that you are aware and feel secure every step of the way.