Premium Financing

How it works

• The client pays part of the premium, and a bank loan pays the rest.
• The policy is assigned or pledged to the bank, which sets the loan amount based on the policy’s cash value.
• The client pays loan interest regularly, usually at a floating rate referenced to a market benchmark.
• On a claim or surrender, the bank loan is repaid first and the balance goes to the beneficiary or policy owner.

Key concepts

Concept	Meaning
Loan-to-value	The bank lends a percentage of the policy’s cash value.
Floating rate	Interest changes with market rates; higher rates increase the cost of holding.
Margin call	If the cash value falls relative to the loan, the bank may require more funds or collateral.
Currency mismatch	If the loan currency differs from the currency of your assets or income, there is exchange rate risk.

Usually suitable for

• People with larger assets and stable cash flow who fully understand borrowing risks

Usually not suitable for

• People with unstable cash flow
• People who cannot bear interest rate or exchange rate fluctuations
• People relying on policy returns to pay the interest

Risks to note

• Rising interest rates may make the holding cost exceed the policy’s growth.
• If the early cash value is below the loan, the bank may require more funds.
• Exchange rate movements may amplify losses.
• Being forced to surrender early causes large losses.

Questions to ask

• How is the interest rate calculated, and how much has it fluctuated?
• What triggers a margin call?
• In the worst case, how much money do I need to have ready?
• Are the loan and the policy in the same currency?