For individuals with significant wealth and at least $100,000 in annual free cash flow, premium financing is a smart strategy can be a highly effective tool to acquire large life insurance policies without tying up capital. This strategy leverages bank financing to pay life insurance premiums—typically for a permanent policy such as Indexed Universal Life (IUL) or Whole Life—allowing affluent clients to preserve liquidity and potentially enhance returns.

What Is Premium Financing?

Premium financing involves borrowing funds from a third-party lender—usually a bank—to pay the premiums on a large life insurance policy. The policyowner is responsible for interest on the loan each year and may be asked to post collateral for the loan, especially in the early years when the policy’s cash value is low.

This strategy is ideal for high net worth individuals who:

• Need a large amount of permanent life insurance for estate planning or tax-efficiency purposes
• Want to preserve capital for investment or business use
• Have strong credit and consistent cash flow (generally $100K or more annually)

How the Strategy Works

Let’s walk through a simplified example:

Client Profile:

• Age: 50
• Free Cash Flow: $150,000/year
• Net Worth: $10M
• Insurance Need: $10M permanent death benefit
• Solution: Indexed Universal Life policy with premium financing

Scenario:

The policy requires annual premiums of $500,000 for 10 years.

Instead of writing a $500,000 check each year, the client contributes $100,000 of their own funds annually toward interest payments and collateral requirements. A bank finances the remaining premium, loaning $500,000 annually for 10 years—totaling $5 million in premium financing.

As the life insurance policy builds cash value, it becomes partial collateral for the loan. By years 10–12, depending on performance, the policy’s internal cash value may be sufficient to collateralize the full loan amount.

In year 15 or later, the client may choose to:

1. Repay the loan using outside assets
2. Use the policy’s cash value to repay the loan (partial surrender or loan)
3. Let the death benefit repay the loan when the insured passes

Why It Makes Sense

Premium financing gives wealthy individuals a way to secure a substantial life insurance benefit with minimal capital outlay. In many cases, the internal growth of the policy outpaces the cost of the interest on the loan, particularly when policies are funded with disciplined design and managed conservatively.

This strategy also protects liquidity. Rather than liquidating investments or businesses to pay large premiums, clients can keep assets working for them—while still funding a long-term estate planning or wealth transfer strategy.

Important Considerations

• Interest rates: Most lenders tie interest to SOFR or other benchmarks. Rising rates can affect annual loan costs.
• Collateral requirements: Additional collateral may be needed in early years before cash values accumulate.
• Exit strategy: Work with an advisor to plan how and when the loan will be paid off or serviced over time.
• Policy performance: Market-linked products like IULs have caps, floors, and potential variability in cash accumulation.

Premium financing isn’t for everyone—but for qualified clients, it can be a powerful way to achieve long-term financial objectives while maintaining financial flexibility. Always consult with a licensed advisor experienced in premium financing strategies before proceeding.