Most borrowing rates can be anticipated from 2.5% to 6%; depending on the fluctuation of 1 year LIBOR + the fixed spread.
Virtually all premium financing loans have terms of a duration less than the life of the policy.
Carrier downgrades may result in the lender choosing to not pay additional premiums, requiring the borrower to post additional collateral or call the loan and collapse all the collateral to cover any moneys due to the Lender.
Life insurance carriers and premium finance lenders use the same fundamental financial instruments.
Most premium financing arrangements that are designed to provide liquidity to the client at death are 100% collateralized.
In most cases, the client must either post a Letter of Credit (LOC), securities accounts, other non-financed life insurance policies, annuities or any other hard assets approved by Lender to satisfy collateral.
(Note - Settlement Risk pertains to Life Settlement Transaction, Not all Premium Finance Transactions) Some premium financing programs are sold under the assumption that the policy will have a substantial market value at the end of the term.
Settlement offers will vary with the interest rate environment and the degree to which capital will "wait" for a return.
Any premium finance program or broker that induces you to enter into a premium finance transaction with the sole purpose of selling the policy after the policy is no longer contestable by the issuing carrier (generally two years) may be illegal and violate state "insurable interest laws".
Wagering on the life of an insured was common, and many times a person with no interest, economic or otherwise, would take out a life insurance contract on a sea captain running dangerous routes, a boxer facing a deadly opponent, etc.
The courts have found that "intent" is irrelevant, when insurable interest exists at policy issuance.
Clients who are "underwater," where the loan balance exceeds the policy cash value, are being forced to post additional collateral at low risk-weighted rates and/or surrender the policies and pay the outstanding loan balance out of pocket.
Additionally, several carriers who were active in the financing marketplace have been downgraded, causing large-scale exchanges or surrenders from in-force policies.
Retrieved August 16, 2022, from https://www.investopedia.com/insurance/life-insurance-premium-financing-worth-risk/ Premium Financing for High-net Worth Clients.