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What is premium financed life insurance?

Premium financed life insurance is a life insurance policy that is primarily financed by a large lump sum payment. It is a whole life policy and the lump sum starts earning cash value right away.

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This type of life insurance policy is almost exclusively for the wealthy. The following article will provide more information about premium financed life insurance policies, their benefits, and other options.

What are the benefits of a premium financed life insurance policy?

Most people, when purchasing a life insurance policy, are hoping to provide for their family upon death. Generally, most people do not have a large lump sum to use to purchase this type of life insurance policy.

Therefore, a premium financed life insurance policy is not for everyone. But for the wealthy, this is not only a means of providing life insurance, but also a way to benefit from a tax shelter.

A tax shelter is a place that money can be invested without being taxed. For the wealthy, finding legitimate tax shelter is one way to keep more of money that is earned. In 1986 the Tax Reform Act allowed for a premium financed life insurance policy to be used as a tax shelter.

As long as the policy stays active, it will appreciate value tax-free. This is a safe place to put money, without the worry of those funds being taxed. For those in a high income bracket, taxes can result in a loss of up to 30% of the money.

The way it works is the policy owner purchases a whole life insurance policy for a set amount covering almost the entire policy in one lump sum. Since it is a whole life policy, the majority of the money is invested by the life insurance company hopefully resulting in dividends paid out. The more money paid in the lump sum, the more dividend potential.

Though no guarantees are made as far as dividends are concerned, they are very likely to make over the life of the policy. Basically, this type of policy is life insurance, plus an investment.

Another benefit of a premium financed life insurance policy is the tax-free withdrawal option. Policy loans can be made on the premium amount as well as the cash value that has accumulated. Because of the Tax Reform Act of 1986, the money can be accessed tax-free with little or no cost based on the life insurance company providing the policy.

Some life insurance companies charge a withdrawal fee while others do not. Remember, the insurance company is making a profit off your investments so even if they don’t charge you a premium a financed life insurance policy benefits them.

The money that is borrowed from a premium financed life insurance policy doesn’t have to be paid back before death, but the amount of the payout is reduced by the amount that was borrowed. In most cases, the purchaser of a premium financed life insurance policy isn’t relying solely on this type of life insurance policy to provide a payout in the event of death. Typically, premium financed life insurance policies holders have other, more traditional, life insurance policies as well.

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What other options are available, if a premium financed life insurance policy isn’t for you?

Not everyone is in a financial position to purchase a premium financed life insurance policy. For those who cannot, a traditional term life insurance policy is available. A traditional policy allows you to pay a monthly premium rate as opposed to a lump sum payment. In exchange for your monthly premium, your beneficiary will receive a pre-determined payout in the event of your death. As you become more financially secure you can increase the payout amount.

Whole life insurance policies, with some of the premium financed benefits, are also available on a monthly premium basis. A whole life policy of this type allows you to withdraw money and earn interest and cash value on the money paid in. However, the same tax laws do not apply and the money owed at the time of death, is still deducted from the payout.

Whatever type of policy you are looking for, whether a premium financed life insurance policy or a traditional term life insurance policy, viewing rates and receiving quotes from numerous companies is important. Instead of flipping through the phone book or going to several websites, try using an online comparison tool. The online comparison tool allows you to see rates and quotes from several companies all in one place.

Enter your zip code and compare online life insurance quotes now!

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