What premium financing is
Premium financing is a way to own a large permanent life insurance policy without paying the premiums out of pocket. A third-party lender pays the premiums to the insurance company, and you pay interest on the loan. Your own capital stays invested in your business, your real estate or your portfolio, where it may be earning more than the cost of the loan.
It's built for families and business owners who need significant coverage and have the net worth to support it, not for someone stretching to afford a policy.
What families use it for
- Estate liquidity. A death benefit that can pay estate taxes, including Maryland and DC estate tax, so heirs don't have to sell the business or the property.
- Business succession and buy-sell funding. Coverage that lets partners buy out an owner's share without draining the company.
- Key person protection. Coverage on the people a business can't easily replace.
- Legacy and Bucket 3. A large, properly structured policy can build cash value that may later support tax-free policy loans, once the financing is repaid.
How it works
- Design the policy. We size an indexed universal life policy to the need, with the right carrier, and model it at conservative assumptions.
- Arrange the loan. A specialty lender reviews your finances and agrees to pay the premiums, usually for 5 to 10 years. Rates are typically variable and tied to a benchmark like SOFR plus a spread.
- Post collateral. The policy itself is assigned to the lender. In the early years, when cash value is low, the lender requires additional collateral such as cash, securities or a letter of credit.
- Pay the interest. You pay the loan interest each year, or in some designs the interest is added to the loan.
- Exit. The loan is repaid on a planned date, from the policy's cash value, from outside assets, or from the death benefit. The exit plan is designed on day one, not later.
Who it fits
- Have substantial net worth and income. Lenders set their own minimums
- Have a real need for a large death benefit
- Have assets you'd rather keep invested than use for premiums
- Can post collateral and handle rising interest costs
- Need financing because you can't afford the premiums
- Would be strained by a collateral call or a higher interest rate
- Don't have a clear exit plan for the loan
- Are looking for a short-term return
The risks, in plain English
Premium financing uses leverage. If it underperforms, you can be asked for more collateral or more cash, and in a worst case the policy can be surrendered to repay the loan.
- Interest rate risk. Most loans are variable. If rates rise, your interest cost rises with them.
- Collateral calls. If the policy's cash value grows more slowly than illustrated, the lender can require more collateral.
- Policy performance. Indexed crediting depends on caps and participation rates the carrier can change. Illustrations are hypothetical and not guaranteed.
- Lender and renewal risk. Loan terms can change at renewal, and a lender can decline to renew.
- Exit risk. If the exit plan doesn't work as designed, you may need outside assets to repay the loan.
That's why every premium financing case gets a stress test at higher interest rates and lower crediting rates, a written exit strategy, and a review with your CPA and attorney before anything is signed. We revisit the case every year.
Questions we hear often
Is premium financing a way to get free insurance?
No. You pay interest on the loan, you post collateral, and you're responsible for repaying the loan. It's a way to use leverage so your capital can stay invested elsewhere.
How much net worth do I need?
Lenders set their own requirements, and they're significant. We'll tell you on the discovery call whether it's realistic for you, and if it isn't, a self-funded policy may fit better.
What happens if rates go up?
Your interest cost rises. We model higher-rate scenarios before you commit so you know what the plan looks like if rates move against you.
Can the loan be repaid early?
Usually yes, from outside assets or policy values, depending on the lender's terms. Repaying early can reduce interest costs and collateral needs.