Premium Financing and IFA Lending Explained
Insurance related borrowing can serve different purposes. Before considering a structure, identify what the loan will fund and what will repay it.
Financing a premium
A premium loan provides funds toward an insurance payment. The borrower then owes a separate loan balance under the financing agreement. The security, repayment schedule, and payment route need to be established before funds move.
Start with the ongoing commitment. Can the borrower maintain the policy and meet the loan payments? How will future premiums be funded? Is the arrangement designed for one payment or an ongoing need?
Borrowing under an IFA
An Immediate Financing Arrangement uses permanent life insurance within a separate collateral lending structure. In a common bank version, premiums are paid from the client’s resources before borrowing is advanced under the approved facility. Other assets may be needed as security.[1]
The borrower needs to understand both the policy and the loan. Changes in policy values or borrowing costs can create a need for additional collateral or repayment. A lender’s review or demand rights depend on the contract.[2]
Using a temporary bridge
A premium bridge adds another loan and another repayment step. Before proceeding, confirm that the receiving lender accepts the source of the premium funds and the proposed use of its advance. The insurer’s payment requirements and any competing security rights must also be addressed.
Questions to resolve include who pays the insurer, what evidence of payment is required, when the next advance can occur, and how the bridge is repaid. A commitment that still has outstanding conditions is not the same as available cash.
Considering the tax treatment
Tax treatment depends on the arrangement and the use of the borrowed funds. A life insurance policy used as collateral does not by itself establish an interest deduction. Interest on money borrowed directly to acquire life insurance is generally excluded under the usual interest deductibility rule.[3]
The practical starting point is a written description of the policy, each loan, the security, the movement of funds, and the repayment plan. Review it with the professionals involved before committing to the borrowing.
Discuss Insurance Related Financing
This article provides general information and is not personal financial, tax, legal, or insurance advice. Obtain advice relevant to your circumstances before entering a financing arrangement.
References support the educational explanations and do not establish a relationship between Catalyst and any named institution. [1] Manulife Bank, Specialized lending. [2] Manulife, Leveraged life insurance, personal ownership. [3] Canada Revenue Agency, Income Tax Folio S3-F6-C1, Interest Deductibility.
