Proper financial planning involves making sure you are taking advantage of
every available asset and financial opportunity. However, there is one asset
people often ignore that could potentially add hundreds of thousands of dollars to your
net worth---your insurability.
Everyone in reasonable health could go to an insurance company and get life
insurance, this is your insurability. Life insurance companies will base
how much insurance to give you on your age, health, assets, income, etc. Often,
people will buy insurance based on paying off a liability at death or replacing income.
However, they may not purchase the maximum amount the insurance company
will allow. There is now a way to monetize this excess insurability and
potentially increase your net worth by hundreds of thousands of dollars through an
innovative program called Premium Financing. The market for this type of program is
currently $10 billion dollars and expected to increase to over $100 billion over the
next few years.
During the AIDS crisis of the 80's many AIDS patients had life insurance
policies and what they thought was a terminal illness. Often times they needed
money to pay for astronomical medical bills. Investment companies sprung up that were willing to buy their policies for more than the cash value, pay the premiums, and then would get the death benefit when they died. It was a win-win situation---the AIDS patient got money that they needed and the investment company got the eventual death benefit of the life insurance policy.
Today, these investment companies focus on buying policies from seniors who no longer want or need them.
Premium Financing is a new twist on this concept. Instead of buying life insurance policies from people who do not want them, Premium Financing focuses on getting people to buy life insurance with the ability to sell it back within a short time period. Here's how it works:
- Step 1: A senior, usually age 70 or older, would buy a life insurance policy
- Step 2: A finance company would lend the senior the money to pay the premiums. The loan would be backed by the life insurance policy and there would be no out of pocket expense to the senior.
- Step 3: The senior would hold the policy for a period of time, generally 2 years. If he or she died during that period, their beneficiaries would get the death benefit of the policy minus the premiums the finance company paid plus interest.
- Step 4: at the end of two years, the senior can choose to keep the policy by paying back the finance company or selling the policy to an investment company and getting the proceeds after the finance company is paid off. Here is an example of a typical transaction:
A senior buys a $5 million insurance policy on his life. Premiums of $250,000 per year are paid by the finance company. If he dies during the 2 year period his family gets $4.3 million after the lender is paid back. After 2 years, the senior sells the policy and nets $375,000. So in effect, the senior has no out of pocket cost, if he dies during the two years his family gets $4.3 million and if he lives the full 2 years, he gets $375,000.
Those who take the time to understand and take advantage of this new market may find a way to add hundreds of thousands or millions of dollars to their net worth and the net worth of their family.