What is premium financing for life insurance & is it right for you?

Key takeaways

Premium financing lets you borrow funds to pay for a life insurance policy, preserving your liquidity.
It’s typically used by high-net-worth individuals with estate planning goals.
The loan must be repaid, usually with interest, and often involves using the policy itself as collateral.
This strategy is complex and not risk-free — it's important to understand interest costs, qualification criteria, and potential tax implications.
Work with an experienced financial advisor before pursuing premium financing.

What is premium financing?

Premium financing is a way to purchase life insurance without paying for the policy entirely out of pocket. Instead, a third-party lender — typically a bank or specialty financing firm — pays the premiums on your behalf. You or your trust are responsible for repaying the loan, which includes interest and collateral requirements.

This strategy is most often used for large permanent life insurance policies that are part of a long-term estate or wealth transfer plan.

Explore the basics of premium financing

How it works

Let’s say a business owner wants to purchase a $10 million whole life insurance policy to help cover estate taxes. Rather than paying the steep annual premiums directly, they use a premium financing arrangement:

A lender pays the yearly premiums.
The policyholder assigns the life insurance policy’s cash value and death benefit as collateral.
Over time, interest on the loan accrues, and repayment is typically made using other assets, a trust structure, or the policy’s death benefit.

In many cases, borrowers set up an irrevocable life insurance trust (ILIT) to hold the policy and manage both the loan and estate planning logistics.

Learn how ILITs work

Who qualifies?

Premium financing is not designed for average policyholders. It's best suited for individuals who meet the following criteria:

High net worth: Typically $5 million or more in assets.
Strong credit profile: Borrowers must qualify for favorable interest rates and loan terms.
Estate planning need: Usually to offset estate tax obligations or fund legacy goals.
Stable cash flow or liquidity access: Even if you’re not using your liquid assets to pay premiums, you'll need to show the ability to cover loan interest and collateral requirements.

Lenders will also assess whether the policy’s projected performance (e.g., dividends or cash value growth) reasonably offsets the loan terms.

Compare life insurance strategies →

Key risks to consider

While premium financing can free up capital for other investments, it introduces several risks:

Loan interest and repayment: If interest rates rise or the policy underperforms, the loan could become more expensive than expected.
Collateral requirements: You may need to pledge additional assets if the policy’s value falls short.
Policy lapse risk: Failure to keep up with the loan or premium structure could result in losing coverage — or worse, triggering unexpected taxes.
Estate complexity: Improper structuring could result in the policy being included in your taxable estate.

It’s essential to work with a financial advisor and estate attorney familiar with life insurance finance tools to fully understand your obligations.

Understand the risks of life insurance loans

Is premium financing right for you?

Premium financing can be a smart strategy — if used with care. It’s ideal for individuals with large estates, illiquid assets, and long-term wealth transfer goals. But because it introduces debt and market exposure, it’s not right for everyone.

This strategy may be a fit if you:

Want to fund a $5 million+ life insurance policy without disrupting your investments
Plan to use an ILIT to keep the policy outside your estate
Have trusted legal and financial advisors to manage the structure

It’s likely not a fit if you:

Have low tolerance for interest rate changes or borrowing risk
Can’t provide sufficient collateral or cash flow
Are purchasing a small to mid-size policy

If you’re unsure, start by comparing policies and talking to a financial advisor familiar with premium financing structures.

Compare life insurance strategies →

This article is for informational purposes only and does not constitute legal or financial advice. Always consult an estate planning attorney or financial advisor before making life insurance decisions.

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