Insurance Finance: Is it really Other People’s Money?

A person or a business might have need for a large insurance policy (typically life insurance / key person insurance), but might not want to use their cash flow to cover the substantial premiums. Enter premium financing where a bank or other entity will loan the money to pay for the premiums.

This is a form of a leveraged transaction, where one is getting a sizable benefit (the policy) at low out of pocket cost. Typically the insurance policy itself will be held for collateral. Generally, the bank will want to see the insured pay the interest on the loaned premium but it is possible in some cases to have no out of pocket costs.

The main aspect that lenders are interested in is the reason that the money is being borrowed for insurance premiums. A good reason to finance an insurance policy would be if an entrepreneur would like to have her cash invested in her own venture. Or an investor might not want to cash out of investments that are producing a good return, in order to buy life or business insurance.

The good news is that if a risk averse bank (is there any other kind?) is willing to lend money against an insurance policy as collateral, then they must view the risk as acceptable. The reality is that with today’s rocky stock markets, insurance is still considered a safer bet where leveraging might actually make sense.