Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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Collateral Required Premium Finance Life Insurance

If you are considering getting a premium finance life insurance policy you may wonder, if collateral required on this type of policy. It depends on the insurance company as to whether or not collateral is required.

Take a look at your own insurance rates quotes for this coverage with a zip code now!

Generally, the financial portfolio of the policy holder itself is enough collateral for most insurance companies. The following article will provide additional information about collateral requirements as well as general information concerning premium financed life insurance policies.

What are the collateral requirements for a premium finance life insurance?

Collateral required for a premium finance life insurance policy will depend on the company as well as the individual’s financial portfolio. For the majority of companies, individuals interested in this type of policy must have assets in the amount of $3 million or higher. This, in and of itself, is typically enough collateral for many companies.

Defaults and non-payments for individuals in this income bracket are rare so many companies feel safe without requiring collateral. But, with the recent recession, more insurance companies are changing their collateral policies.

It is important to note that insurance companies benefit greatly from individuals who purchase a premium financed life insurance policy. This is because the insurance company has access to large lump sum premium payments that they can in turn invest for profit.

Even if the individual ends the policy or defaults on a payment, chances are the insurance company has already made a profit from the individual’s money. This is the reason some companies don’t require any collateral or just require a small amount of collateral.

If collateral is required, there are a variety of options to choose from including:

  • Cash
  • A letter of credit from a reputable bank or financial institution
  • Cash equivalent
  • Security holdings that are marketable

Any of these items are acceptable collateral for most insurance companies. Some companies may also allow vehicles or boats to be added as collateral depending of the type of vehicle and the value of the vehicle. Also, the vehicle must be paid off so there is no chance of repossession from the loan holder.

Real estate used to be a popular and typical form of collateral that insurance companies and banks would routinely accept. However, due to the recent real estate fall out, real estate is no longer accepted as collateral by many companies.

It may be accepted as part of a group collateral (such as some cash, some real estate), but real estate is being accepted less and less as the only collateral on a premium finance life insurance policy. This includes both primary residences and rental property.

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What are the basics of a premium finance life insurance policy?

Premium finance life insurance policies are not commonly known policies. Some financial advisors and attorneys aren’t even familiar with them. This is due to the fact that they are for the rich and not for the common person looking for life insurance. That’s to say, they are atypical.

One reason financially strong individuals purchase premium finance life insurance policies is because the money invested in this type of policy is protected from taxes. The money can be withdrawn in the form of a tax-free loan. The wealthy know this, and don’t typically use it solely as a life insurance plan but rather as a way to get some tax breaks. This is entirely legal according to the Tax Reform Act of 1986.

Basically, when purchasing this type of policy, the insured pays a large lump sum towards an overall premium. This money is then invested by the insurance company and money is made both for the insured and the insurer. It is a win/win situation for both parties.

If money is taken out for a loan it should be paid back before death, but if it is not, the owed amount will be taken off of the payout. The payout can be designated to a trust fund, a personal beneficiary, an institute beneficiary, or an estate.

If you think a premium finance life insurance policy is for you or you are simply interested in getting more information about life insurance, try using the online comparison tool. This allows you to input all your information in one place and receive rates and quotes from several companies.

You can then use that information as part of your overall decision making process. Comparing rates and quotes from many different companies is a proven way to save money on insurance premiums.

Enter your zip code into the free rates tool and compare life insurance quotes now!