Three funding routes
| Dimension | Own funds | Premium financing | Policy loan (after issue) |
|---|---|---|---|
| Lender | None | Bank or other financial institution | Insurer |
| Timing | At application | At application | After the policy has built cash value |
| Collateral | None | Whole policy by deed of assignment | Cash value, up to its limit |
| Amount | — | Guaranteed cash value or day-one surrender value × LTV (published examples 75%–80%) | A proportion of cash value set by the policy terms |
| Rate | — | Benchmark plus margin (1-month HIBOR + 0.75%–2%; USD best lending rate − 1.5%, HSBC KFS 16 Oct 2026) | Policy loan rate set by the insurer from time to time |
| Interest payment | — | Monthly; non-payment is default | Usually accrues to the balance |
| Policy rights | Intact | Assigned: surrender, withdrawal, beneficiary change and cooling-off cancellation need the lender's consent | Retained, but the balance is deducted from any benefit |
| Regulatory documents | FNA | FNA, three affordability tests, over-leveraging assessment, IFS-PF, updated cooling-off notice; HKMA lender requirements | Policy terms only |
| Early repayment demand | None | Yes (IFS-PF point 6) | None, but the policy may lapse if the balance exceeds cash value |
| Exit cost | Surrender value shortfall | Shortfall plus interest paid, early repayment charges, currency conversion | Shortfall plus accrued interest |
| Sources of loss | Early surrender, bonuses below illustration | All of those plus rising rates, currency mismatch, forced surrender | All of those plus compounding interest |
A policy fully paid with own funds and later pledged to a bank is not premium financing under footnote 3 of the IA circular; it carries no IFS-PF or affordability-test requirement, although the same assignment restrictions apply.
Choices inside premium financing
| Choice | Option A | Option B | What decides it |
|---|---|---|---|
| Currency | HKD loan: 1-month HIBOR + margin, daily or monthly reset, actual/365, 75% LTV in the HSBC example | USD loan: USD best lending rate − margin, infrequent changes, actual/360, 80% LTV | Match the loan to the policy currency and, ideally, to income currency; HKD–USD mismatch is bounded by the linked exchange rate band of 7.75–7.85 but not eliminated |
| Rate type | Floating: moves with the benchmark; usually prepayable without charge | Fixed for 3 or 5 years (4.3% indicative in the HSBC KFS), then floating; 1%–2% charge for prepayment during the fixed period | Whether you expect to need to reduce leverage during the fixed period |
| Repayment | Interest-only: lowest instalment, principal due at maturity | Amortising or ad hoc partial prepayments: higher outlay, falling leverage | Whether the source of the maturity repayment is already identified |
| Tenor | Shorter: earlier maturity, higher refinancing dependence | Longer (10 years is common): more years for bonuses to accrue, longer rate exposure | Compare the loan maturity date with the policy's breakeven year; refinancing is at the bank's discretion |
Reading the comparison
The comparison does not say which route is better. It says what each route loses under three conditions: a three-point rise in rates (no direct effect with own funds; about 6.4 points of annual cost on own funds when the loan is 2.1 times own funds), non-guaranteed bonuses at half the illustration (a loss under every route, largest under financing because interest continues), and a need to exit in year three (surrender shortfall with own funds; surrender shortfall plus interest and charges with financing unless the loan can be repaid from other assets). The route is affordable when the financing column's three numbers are acceptable.
Sources and dates
- Circular on the supervisory standards and key requirements on the use of premium financing (footnote 3) — Insurance Authority (IA) · 2022-04-01
- Important Facts Statement – Premium Financing — Insurance Authority (IA) · 2022-04-01
- Key Facts Statement (KFS) for Insurance Premium Financing (Fixed rate) — The Hongkong and Shanghai Banking Corporation Limited · 2026-10-16
- Insurance Premium Financing (product page) — The Hongkong and Shanghai Banking Corporation Limited · 2026-11
- Premium Financing Activities for Insurance Policies — Hong Kong Monetary Authority (HKMA) · 2023-10-16
Cite this page
You may quote this page freely; please keep the source and date. Suggested format:
Premium Financing Observer Editorial (2026). “Own Funds, Premium Financing or Policy Loan: A Comparison.” premiumfinancing.hk. https://premiumfinancing.hk/en/compare/ (accessed YYYY-MM-DD).