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Premium financing

Premium financing lets you buy the life insurance you need without liquidating other investments or materially changing your cash flow.

To maximize coverage, the annual premiums are funded by a loan. Borrowing reduces out-of-pocket cost while still putting the protection in place. Clients meet the lender’s collateral requirements with assets such as cash, marketable securities, or mortgage-free real estate — which means current stock positions and other assets can stay where they are.

Structured properly, premium financing can help transfer an estate to heirs without forcing the sale of assets to do it.

This carries real risk. Like any leveraged strategy, premium financing is exposed to market volatility and changing interest rates. If the policy underperforms or borrowing costs rise, additional collateral or out-of-pocket contributions may be required, and the arrangement can fail to perform as illustrated. We tell clients about these risks up front and stay alongside them to manage and minimize them — but nobody should enter this without understanding that the leverage cuts both ways.

Who it is for

The target market for premium financing is under 2% of the population. It tends to suit high-net-worth individuals and business owners who have a defined life insurance need, and it offers the potential for lower out-of-pocket cost than a traditional non-financed policy while still securing a death benefit or tax-advantaged supplemental retirement income.

  • Has a genuine need for life insurance
  • Has a net worth of $5,000,000 or more — with certain carriers, those under 50 may qualify at $2.5 million with a minimum annual income requirement
  • Has liquid assets sufficient to pledge as security for loan repayment, if additional collateral is required
  • Meets the carrier’s underwriting guidelines with a favorable offer
  • Meets the lender’s financial requirements for the loaned funds

What it is used for

  • Family protection
  • Estate liquidity
  • Wealth transfer
  • Charitable planning
  • Key employee and deferred compensation agreements
  • Buy/sell partnership agreements
  • Tax-favored supplemental retirement income

That last one depends entirely on the policy being structured correctly by someone competent in these arrangements. Done wrong, the tax treatment does not hold.

How we work on it

Premium financing is a complex financial transaction. Only clients who are comfortable with leverage, and who have access to skilled tax and legal advisors, should consider it. Our team works alongside you and your advisors through the whole implementation — we do not hand this off.

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Premium financing involves borrowing and is not suitable for most people. Outcomes depend on policy performance, loan interest rates, collateral requirements and underwriting, none of which are guaranteed, and results may differ materially from any illustration. Any policy guarantees are subject to the claims-paying ability of the issuing insurance company. Policy loans and withdrawals reduce the death benefit and cash value and may have tax consequences if the policy lapses or is surrendered. Jeff Batson is a Registered Financial Consultant® licensed in life, health, annuities and Medicare; he is not an attorney, CPA, or securities-licensed advisor, and nothing here is legal, tax, or investment advice. Consult your own tax and legal advisors before entering into any financed arrangement.