by Donald E. Sanders
Premium financing so simple yet so misunderstood. For high net worth individuals obtaining a level of life insurance, premium financing can be an extremely valuable financial tool. When properly understood, its purpose and benefits are simple and clear. Yet even though it's been a financial instrument for a long time, some industry professionals still find premium finance a mystery. Others misunderstand it altogether. As a consequence, many high net worth clients miss out.
Two words: Retained capital. Most high net worth individuals keenly appreciate the value of keeping their capital actively employed. In fact many high net worth individuals are asset rich but cash poor precisely because of this. While they have more than enough capital to cover their premiums, it often means liquidating appreciating investments or removing capital from investments prematurely. These individuals understand the concepts of leverage and arbitrage and employ them in their daily business lives.
Enter premium financing. The MedEvac Company, Had its owner been forced to write a hefty annual premium check, he would not have had the capital to invest in a net copter design which he considered key to the company's growth. By financing his premiums, he obtained the life insurance he needed and employed his retained capital to develop the design prototypes necessary to attract outside investment for production.
Premium financing translated into a lot more burgers for a young fast food entrepreneur we helped out. Had he funded the premiums himself on his $40 million dollar policy, he would have to give up almost two million dollars of potential investment capital in the first three years alone. By financing his premiums, he retained enough capital to invest in an additional burger franchise in the first three years of his loan. And here's what we love. The additional three million dollars in revenue from the new store yielded a net that more than paid for his financing. That's the value of premium finance.
Premium financing offers high net worth individuals other advantages you are no doubt familiar with, like the delay in paying income and gift taxes. But here's an observation we've witnessed over the years. When people insure, they tend to underinsure for reasons that are usually shortsighted. Using the efficiencies of premium finance, a client can almost always procure the amount of coverage they truly need. We've had numerous cases where we've helped clients obtain more life insurance - in one instance the insurance benefit grew tenfold from $500,000 to $5,000,000 - for the exact same investment outlay. We love helping clients become more efficient! American International Group, Inc. is the largest premium finance company in the country.
http://www.goarticles.com/cgi-bin/showa.cgi?C=618380
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