Premium Financing Overview

Premium Financing is a leveraging technique primarily used by high-net-worth individuals needing substantial life insurance coverage but would like to acquire coverage without giving up the current use of assets invested in their business or portfolio.

This approach capitalizes on the difference between low borrowing rates and the cash accumulation value within the policy, making it suitable for affluent individuals experienced with sophisticated financial arrangements. The borrower will be required to post collateral at least equal to the amount of the indebtedness plus any accrued interest.  The policy’s cash surrender value can be pledged as the primary collateral, but the lender will likely require additional collateral, usually liquid assets, to the extent that the policy net cash surrender value is insufficient to secure the loan principal and accrued interest.

Loan maintenance is an ongoing consideration for this strategy, particularly the payment of loan interest.  Certain arrangements may allow the annual loan interest to accrue as part of the loan.  However, most lenders will not participate in this lending arrangement unless the borrower pays the annual loan interest, either out of pocket or via withdrawals from the policy. 

Upon maturity, or at such point there no longer exists an arbitrage, the loan is repaid via the client’s retained assets and/or life insurance cash surrender value.  Arbitrage is realized when the return on a client’s retained assets exceeds the interest rate on the premium loan or when the interest rate credited to the life insurance policy’s cash value exceeds the loan interest rate on the financed premiums.

This strategy is often employed by individuals with a net worth of $5 million or more and small business owners to avoid asset liquidation for premium payments. However, it is not universally applicable and requires thorough consideration before implementation.

We welcome any questions or opportunities to assist you or your clients in achieving identified goals. We take pride in serving a select number of families, businesses, and charitable institutions each year, and we look forward to hearing from you.