In its simpler, earlier form, premium finance has significant merits. ?It deals with a real insurance need and allows a client to bridge a period of time when they are simply not able to pay premiums due to illiquidity constraints.
As happens to many good ideas, this one was ultimately perverted resulting in a concept described as stranger-owned life insurance (STOLI). ?In this scenario, a client would essentially pledge their life expectancy to others in exchange for a cash payment today. ?All of the life insurance was purchased with borrowed funds and the loan was to be repaid by selling the insurance in a life settlement, and using the proceeds to pay off the loan. ?Most insurance companies now consider this to be a violation of the "insurable interest" rule mentioned earlier.
At its heart, premium finance is still alive and well, though much harder to execute because of the restrictions and policies set in place by the insurance companies.
Excerpt from The Complete Guide to Estate and Financial Planning in Turbulent Times (Collaborative Press, 2011) - Walt Dallas, Contributing Author
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