Financed insurance is a life insurance policy with special arrangements made for the payment of the policy premiums. Instead of the insured party paying the premiums himself, he makes a deal with a third-party lender or with the insurance company to pay the premiums on his behalf. The insured party ends up with the benefit of coverage without having to pay the premiums immediately. This arrangement is structured according to a life insurance financing contract that specifies the loan term and interest rate.
Life insurance can be an investment vehicle and an integral part of a wealth transfer plan for high worth individuals. Unlike many average people who buy just enough life insurance to protect their families, wealthy individuals can use trusts and transfer companies to hold cash-value life insurance policies on their own lives. They typically do not need the proceeds of a life insurance policy the way an average person typically does. He can buy a policy as an investment gamble that will pay out a significant amount if he dies unexpectedly but still retains a cash value if he ends up holding the policy to maturity.
Some individuals have most of their assets tied up in investments that cannot be easily liquidated without losing money. In other scenarios, money is invested in high return investments that it would make no sense to abandon. Regardless, when it comes time to take out an insurance policy on his life, the individual decides to borrow the money instead of using his own. He enters into an agreement with a third-party lender or the insurance company offering the policy to front the money to pay the premiums. The resulting arrangement is financed insurance.
All financed insurance uses the cash value of the policy as security. If the insured party dies without repaying the money loaned to pay the premiums, the loan is paid out of the death benefit. The lender can also foreclose against the policy. Foreclosing takes the policy from the insured and transfers it to the lender. The lender can then sell the policy on the secondary insurance market or hold it until maturity, even though the life that is insured is still the borrower's.
Many financed insurance arrangements require other types of recourse. The borrower is often required to put up additional assets to secure the loan; this is not usually a problem for the type of individual who enters into this sort of transaction. He typically has sufficient assets to secure the loan but just doesn't want to liquidate them.
The other version of financed insurance is the non-recourse variety. In this instance, the lender extends the loan without requiring additional security. If the insured party defaults, the lender only has recourse against the policy. This type of financed insurance is no longer popular with lenders.