A premium finance transaction involves the borrowing of money from a bank or hedge fund to pay the premiums of a newly originated insurance policy.  The majority of financed policies have a face amount of over $1,000,000. The insured will borrow the money for a predetermined length of time. The same banks and hedge funds involved in life settlements are also the lenders for premium finance transactions.

The insured who qualify for premium finance are typically in good health with a high net worth. Financing is a great financial tool for those who need the coverage of an insurance policy for estate planning or wealth transfer. It allows these individuals to purchase the policy at little to no out of pocket costs.

Many of the financing options available today are approved by the insurance carrier. These programs, called recourse financing, involves the client putting up a letter of credit or other form of collateral to offset the loan should there be a default. Non-recourse financing uses the policy as the only collateral requirement for the loan. Should the insured default on the loan the rights within the policy would revert to the lender. It should be noted that there are no documented incidences of a lender exercising the letter of credit or collateral in a recourse finance deal. The lender always takes over the policy as in a non-recourse program.

At the end of the loan term the insured can pay the total loan amount plus interest to the lender and keep the policy. If the coverage is no longer needed or wanted the policy can be marketed and sold in the secondary insurance market. The proceeds from the same will be used to pay back the lender with the remainder going to the insured. If the policy is no longer needed or wanted and not saleable the policy will revert to the lender.