Life insurance policies that offer value appreciation and cash value often come with dividends and a surrender value. Therefore, these policies have value as a security. When interest rates on bank loans are relatively low in the market, these policies become attractive to those who can afford the interest on loans. The insurance policies are then used as security in a Premium Financing arrangement.
You can enjoy greater financial flexibility when paying premiums. By using Premium Financing to cover part of the premium payments, you will not need to liquidate your assets for premium payments. This frees up your funds for capturing other opportunities, investments or expenses.
The interest rate on a Premium Financing loan is calculated based on HIBOR/ Cost of Funds plus a margin, and it is not always fixed. This means rates can increase or decrease if the market fluctuates. A large increase in the interest rate will mean you are required to pay more interest. The interest may even be higher than the return of the life insurance policy, leading to losses. HIBOR is the Hong Kong Dollar Interest Settlement Rates as published by The Hong Kong Association of Banks (www.hkab.org.hk).
Depending on your policy, the market and other factors, dividend payments may not be guaranteed, the non-guaranteed benefits may be zero which can affect your returns. Unlike for some types of investments, there is no historical support for deriving profit from the difference between a loan rate and the return from a life insurance policy.
With Premium Financing, you consent to transfer your rights under the policy to the bank. Should you cancel a policy acquired through Premium Financing, the bank will hold the final decision on policy cancellation, you may have to repay the loan principal, any early repayment penalties, interest and other administrative fees accrued. Upon the death of the insured person, the policy’s value and/or death benefits will first go to pay off the outstanding loan balance, and any remaining value will then go to the policyholder or your policy’s beneficiary. In addition, the bank may demand early repayment of part of the loan if the loan principal exceeds a certain percentage of the policy’s cash value. Should you be unable to pay, the bank has the right to cancel the policy, end all coverage and apply the surrender value to the loan balance. For details on this and other risks, please read below.
Potential Risks – Things to consider before choosing Premium Financing
As with any lending facility, Premium Financing involves potential risks. Please read and understand the following potential risks in order to make a smart, informed decision about using Premium Financing.
Consequence of late repayment and default of loan facility
By choosing Premium Financing, you agree to repay the loan amount and interest payments according to a repayment schedule and relevant terms and conditions. Late payments or default may be grounds for the bank to demand immediate full repayment and to surrender the policy, causing loss of coverage for the insured and other rights under the policy. You will still be liable for any outstanding amount that is not covered by the value of the surrendered policy. The bank can choose to offset any outstanding amount against any obligations owed to you by the bank (e.g. balances in your accounts with the bank). Furthermore, it may not be possible for you to obtain similar coverage due to changes in health conditions, etc.
Risk of collateral top-up and repayment on demand
The bank reserves the right to review the Premium Financing facility, and restructure or terminate the facility at any time. Under certain circumstances (as stated in the loan facility contract), you may be asked to provide additional collateral, or partially/fully repay the outstanding loan. Failure to meet the requests may trigger the bank to restructure/terminate the loan or surrender the policy. Please read the terms and conditions of the contract, and be sure you fully understand the sections regarding frequency of review, circumstances that may trigger requests and any arrangements related to such requests. Before proceeding, ensure you can financially meet these circumstances before opting to use Premium Financing to finance life insurance.
Impact of early termination/surrender/withdrawal
Please be aware that, should the bank exercise its right to terminate/surrender the policy or withdraw cash before the end of policy term, the following situations may arise:
Exposure to risk of non-guaranteed benefits
Please remember that the benefits shown in the Benefits Illustration are for illustration only and are not guaranteed. Your actual benefits receivable may be lower, may even be lower than the interest payable for the loan facility, and may even be zero. If the total return from the policy is lower than the interest payable, you will suffer a financial loss.
Exposure to exchange rate fluctuation
If the loan currency differs from the policy currency, you may be exposed to exchange rate fluctuations. With Premium Financing, you may be required to convert the proceeds received under your policy to the loan currency under the prevailing exchange rate in order to settle loan repayments. If the proceeds received from the policy are lower than the outstanding loan amount due to adverse exchange rate fluctuations, you will suffer a financial loss.
Exposure to credit risk
Should the Insurer default on its obligations or suffer an adverse change to its credit rating, the bank reserves the right to request additional collateral from you, adjust your credit limit, or restructure/terminate the loan facility. In case of termination, you will be obligated to immediately repay the loan, all interest and administrative fees accrued, and you will be liable for any shortfall between the amounts of the proceeds of the policy and the outstanding amount of the loan.
Release and access of information
The bank may access your policy information and obtain information relating to your life insurance policy from the Insurer (e.g. surrender value, cash value, and any loans/advances on the policy).
To borrow or not to borrow? Borrow only if you can repay!
The information contained in this article is for general reference only and is subject to the policy terms of different types of insurance plan. This article does not constitute an offer for the purchase or sale of any banking or insurance products or services. Products and services are subject to individual needs. Customers should not solely rely on the information on this webpage alone to make any investment and/or insurance decisions. Premium financing is generally considered to be a payment option for customer which involves borrowing, incurring interest payment (the rate is not fixed), and losing your rights under the insurance policy and other risks. Please contact your Relationship Manager to assess your financial needs and understand the risks involved in Premium Financing before making any financial decision. The specific details, terms and conditions of Premium Financing should refer to relevant Premium Financing loan documents. Customers should read in details for ensuring understanding of risks involved. DBS Bank (Hong Kong) Limited (“The Bank”) and its officers, agents, representatives and employees accept no responsibility for any reliance on the calculations or conclusions reached by the customer. The Bank accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from the customer’s use of the information sheet, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with these calculations.Copyright in all materials, text, articles and information contained herein is the property of, and may only be reproduced, redistributed or forwarded with permission of an authorised signatory of, the Bank. Copyright in materials created by third parties and the rights under copyright of such parties are hereby acknowledged. Copyright in all other materials not belonging to third parties and copyright in these materials as compilation vests and shall remain at all times copyright of the Bank and should not be reproduced or used except for business purposes on behalf of the Bank or save with the express prior written consent of an authorised signatory of the Bank.