What is premium financing?
Premium financing is a strategy where a third-party lender covers the cost of life insurance premiums on your behalf. You repay the loan — with interest — over time, or your estate repays it using the policy’s death benefit.
This approach is often used for large permanent life insurance policies, especially when you want to maintain liquidity or leave your other assets untouched.
It’s also commonly paired with wealth transfer strategies or estate liquidity planning, particularly for individuals with complex holdings, high net worth, or projected estate tax liability.
Learn more about how premium financing works
Pros & cons of paying out of pocket
Paying premiums directly from personal funds is the most straightforward option. There are no lenders, interest rates, or collateral requirements — but it does impact cash flow and may reduce investment flexibility.
Pros | Cons |
|---|---|
No interest or debt obligation | Ties up liquid assets |
Simpler to manage and structure | May limit other investment opportunities |
No loan underwriting required | Could strain cash flow depending on premium size |
Ideal for smaller policies or high-liquidity individuals | Less tax-efficient in some estate plans |
Methodology: This comparison is based on Policygenius guides on life insurance funding, loans, and estate strategies, all reviewed for accuracy as of August 2025.
When premium financing makes sense
Premium financing can be especially useful if:
You expect your assets to outperform the interest on the loan.
Your estate includes illiquid assets (e.g. real estate, private equity) you don’t want to sell.
You want to preserve your gift tax exemption or avoid using annual exclusion gifts for premiums.
You’ve set up an irrevocable life insurance trust (ILIT) and want to shield policy costs from your estate.
Financing is more complex than paying out of pocket, so it typically makes sense for policies over $5 million or estate plans with significant tax exposure. It’s not a DIY approach — it requires coordination between financial advisors, estate attorneys, and insurance specialists.
Compare life insurance strategies →
Side-by-side comparison
Pay Out of Pocket | Premium Financing | |
|---|---|---|
Simplicity | High — direct payments, no loans | Low — loan structure, ongoing oversight |
Liquidity impact | Immediate out-of-pocket cost | Preserves liquidity; loan repaid later |
Estate tax efficiency | Limited | Can improve efficiency via ILIT structure |
Cost over time | Fixed premiums | Interest and loan repayment costs apply |
Best for | High-liquidity individuals | Asset-rich, cash-light individuals with tax exposure |
This table is for educational purposes and does not reflect a personalized recommendation. Based on Policygenius articles as of August 2025.
Methodology: Based on Policygenius articles on liquidity in life insurance, life insurance estate planning, and premium financing, as reviewed by internal experts in August 2025.
Which strategy is right for you?
There’s no one-size-fits-all answer. The right funding method depends on your liquidity, risk tolerance, and how central life insurance is to your estate plan.
Premium financing may be a fit if you:
Own illiquid assets like real estate or private businesses
Want to maintain capital in the market
Are comfortable with long-term debt and interest risk
Paying out of pocket may be better if you:
Have sufficient liquid assets
Want simplicity and control
Plan to fund a smaller or mid-sized policy
Before choosing, consult a licensed financial advisor and estate attorney to align the funding strategy with your overall legacy goals.
A tailored approach can help reduce estate taxes, improve asset protection, and ensure your insurance strategy works across generations.
Start comparing your options now →
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.
