The financing of life insurance premiums
Potential family and business risks can be detected with good wealth planning, in order to protect our family against contingencies. However, without planning, structuring and organizing, we will not achieve such protection.
- We previously talked about the advantages of planning to obtain liquidity in case of an unforeseen event such as the death of a relevant person through the use of so-called Universal Life insurance. These international insurances have a double component of savings and insurance so that the premiums paid have a return that is used in part by the insurer to guarantee the payment in case of death and partly to capitalise the amount of the premium paid in if the insured decides to withdraw the funds, which is technically called “surrendering” the funds.
This type of insurance usually requires high disbursements, either in a single payment or in successive payments, which serve as a basis for capitalisation. This requires a high financial effort by the policyholder who must use other liquid assets such as his or her investment portfolio to meet this payment. This can leave you without liquidity to take advantage of other investment opportunities.
Having access to financing in multiple currencies as is the case in BBVA in Switzerland, it is appropriate to analyse the possibility of financing the payment of the premium in a currency with a reference rate that is lower than the capitalisation rate of the investments in the reference currency of the investment portfolio as well as insurance.
As an example, the current rate of revaluation of conservative investments in US Dollar is 3% -4% and the financing rate in Euro or Swiss Franc is 1.25%. Therefore, we can finance the payment of an insurance premium at this reduced rate while both the return on investments of our portfolio and the insurance savings component offers a higher return.
1. Example of life insurance with financed premium: Current investment portfolio
- The current investment portfolio guarantees the credit with which the insurance premium is paid.
- The cost of financing detracts from the portfolio’s profitability
2. Example of life insurance with financed premium 10Mn net: Life insurance with financed premium
- The insurance premium does not involve a disbursement since it is fully financed.
- In the event of death, the insured capital is received less premium financing.
- In the event of a surrender, the yield of the insurance savings part would be received net of the financing.
- After some time, the amount recovered may exceed the cost of interest paid until that date.
3. Example of life insurance with financed premium 10Mn net: Total equity
- In the event of a surrender, the value of the investment portfolio is received, plus the surrender value of the insurance policy.
- In the event of death, the insured capital is received plus the value of the investment portfolio.