Life Insurance Premium Financing

Search for premium financing and you will mostly find pages listing insurance companies, as though carriers were the ones lending. They are not. That single distinction sorts out most of the confusion in this category, and it is where the majority of the advice you will read starts from the wrong place.

This page is built on a two hour masterclass we recorded with Kris Stegall, whose team has placed over a billion dollars of financed premium, and Alden Armstrong, who runs product and case design here. Everything below comes from that conversation. The video is the fuller version and it is worth the two hours if you are seriously considering this.

What it actually is

Kris puts it in one sentence: "Premium financing at the end of the day is borrowing money from a bank, using that money to pay premiums on a life insurance policy."

The framing they use is a mortgage. People have borrowed to buy houses, cars and buildings for a very long time, and nobody finds that exotic. Smart money knows when to use somebody else's money instead of its own. Financing a premium is the same idea pointed at a different asset.

It works, in Kris's words, "if there is some sort of positive arbitrage between what you can get from a bank from an interest rate perspective and what an insurance policy might credit, and then other things that you're actually using that capital that you saved to finance investing in other things."

That is the whole case. Money you did not spend on premiums goes to work somewhere that returns more than the loan costs. If that is true for you, financing is efficient. If it is not, you have taken on a loan for no reason.

How the policy has to be built

A financed policy is designed backwards from a normal one, and for a specific reason: the bank needs collateral, and the collateral is the cash value.

So the policy is structured, as Kris describes it, by "putting as much premium as we possibly can into the insurance policy and the smallest death benefit relative to that insurance policy." He calls it counter-intuitive, and it is. A smaller death benefit means a smaller net amount at risk, which compresses the cost of insurance, which lets cash value build faster.

Alden frames the same constraint from the tax side. The policy has to pass the MEC test, which requires a certain amount of death benefit for the premium being paid. Fail it and the tax treatment of everything you take out changes. So the rule is to "buy as large a death benefit as I need to justify the premium I want to pay," and not a dollar more.

This is the same design discipline behind any well-built permanent policy. If you want it without the bank, that is overfunded life insurance, and for most people it is the better starting point.

How the bank thinks about collateral

This is the part that surprises people, and it is the mechanism behind almost every bad outcome.

The policy's cash surrender value is the first line of collateral. But banks are conservative and they underwrite the worst case, not the illustration. They look at what next year's cash value is guaranteed to be, and Kris says they may lend only around 95% against that figure.

Then there is the gap. Alden's example: in year one you might get roughly 80% of your premium showing as cash value. If you borrowed 100% of the premium, the missing 20% has to come from somewhere. That somewhere is outside collateral, sometimes called gap collateral.

Banks want marketable securities for that, liquid and diversified, and Kris says they might lend around 70% against those. Which means posting a dollar of gap collateral takes more than a dollar of assets.

The four assumptions, and why illustrations age badly

Alden's line about a financed illustration: "right there, there are four big assumptions that are being made that are all put nice and pretty into this very nice chart that we're looking at here."

The bank's base rate. Usually SOFR, which as Kris points out "is an overnight rate, which means it changes every single day."

The bank's spread over it. Not fixed. If the bank's own cost of money rises, the spread can widen.

The policy's crediting. On an indexed policy the market does not cooperate on schedule. "The market didn't behave the way you told it to when you sold the illustration."

Caps and participation rates. The carrier can change these. Kris notes some companies have a reputation for moving cap rates as soon as two years after issue.

Four moving numbers, each shown at its friendliest, multiplied together across forty years. That is how a plan that looks certain on paper stops working in practice.

Where "free insurance" came from

Both of them are blunt about this, and it is the single most useful thing on this page.

The pitch worked by stacking three things: very high illustrated crediting rates, usually on indexed universal life; an assumption that loan rates would keep falling; and capitalised interest, so the client never writes a cheque. Roll those together and the policy appears to pay for itself.

Alden describes what happened to the people who bought it. They find themselves "5, 6, 7 years removed from when they started, having to come out of pocket ridiculous amounts of premium, signing over additional capital in their business for collateral or real estate that they own."

Capitalising interest is what makes the trap quiet. Kris: "you're going to pay interest on top of your interest. So over time, it's going to balloon. It's effectively going to be a balloon note." Year one interest on a million dollars at five percent is fifty thousand. Left to capitalise, the balance you eventually have to clear grows every year, and so does the collateral gap it creates.

Two real cases from the masterclass

Reading a financed illustration, line by line

They walk through a real one in the masterclass, and following it is the fastest way to understand what you are actually being sold. The case is a man aged 48.

The funding years

Premiums go in for a set number of years. Kris says policies are typically funded for "5 to 7 years, maybe 10, depending on the design." In the illustration on screen the premium column runs out around year ten, at which point the client stops paying and the structure is expected to carry itself.

The exit, which is the part nobody explains

Around year fifteen the illustration shows a very large negative premium. That is not a payment. It is the exit: the policy takes a loan from the insurance company, and that money repays the bank.

Alden's description of the move is that "in that fifteenth year, you would loan out of the insurance company and effectively refinance the debt." You are not becoming debt-free. You are swapping a bank loan, with its collateral requirements and its annual renewals, for an internal policy loan with neither.

The cost shows up immediately in the columns. Surrender value drops sharply the year the loan comes out, and so does the net death benefit, because a policy loan reduces both. The illustrated net death benefit is simply the gross death benefit minus the outstanding policy loan.

What it looks like at the end

Carried out to age 85, the illustration shows a net death benefit in the low thirty millions against a total outlay of roughly five million. On those numbers the internal rate of return on the death benefit, net of the loan, sits under seven percent.

That last figure deserves a moment, because it is the honest one. Not a spectacular number. Its value is what it is compared against: to land the same amount in a beneficiary's hands from a taxable estate, the illustration suggests you would need something above eleven percent every year, because of what estate tax takes on the way through. The tax treatment is doing most of the work, not the policy's growth.

The risk hidden in the exit

There is a failure mode buried in that year fifteen move and it is worth naming. If the loan taken to repay the bank is large, the remaining net cash value is small. That small remainder now has to grow faster than the policy loan interest plus the ongoing cost of insurance.

If it does not, the loan can grow toward what is left, and the policy can lapse. A lapse with a large outstanding loan is, in their words, "really costly," because it triggers a taxable gain with no cash arriving to pay it. This is the scenario that makes the difference between a plan with margin in it and one built to the last basis point.

This has to be managed, and by more than one person

The point they return to most often is not about the product at all. It is that a financed policy is a live arrangement rather than a purchase, and it needs a team.

Kris is direct that the right structure requires an attorney, a CPA and an insurance adviser who actually speak to one another. He describes the accountant as being just as important as the attorney, because the accountant knows what is possible against the balance sheet. His summary: "It's important to get everybody together, speaking the same language, rowing in the same direction."

The review cadence they recommend is annual at minimum, and bi-annual on more complex cases. Planning, as Kris puts it, is a constantly moving target and does not happen in a vacuum. Rates move, caps move, your balance sheet moves, and the plan either gets adjusted or quietly stops matching reality.

This is also why the two case studies above exist. Both came from reviewing something already in place that the owner believed was fine. Nobody had looked in years, and in one of them the fix was worth nearly three million dollars over a decade without touching the policy at all.

A word on estate tax, and planning around uncertainty

A lot of premium financing is sold on estate tax exposure, and the honest position on future estate tax law is the one Kris takes: he does not know. Exemptions and rates have moved repeatedly and will move again, and he is openly unwilling to build a forty-year plan on a prediction about them.

That argues for flexibility rather than paralysis. A structure that only works under one version of the tax code is fragile in a way that has nothing to do with interest rates.

It is also worth knowing that the absence of estate tax is not automatically good news. He points out that estates settled during an estate tax holiday can lose the step-up in basis, which creates its own liquidity problem for the heirs. There is rarely a version of this where nothing needs planning for.

The underlying exposure is simple enough. At a forty percent estate tax rate, an estate held in buildings, land or a business can force the family to sell the very assets they were meant to inherit, at whatever price is available in the ninety days after a death. Liquidity is the problem life insurance is there to solve, and financing is one way to buy that liquidity efficiently.

Who they say this is for

Kris is specific about the floor: "at its base, $5 million net worth minimum, but I get more comfortable when somebody's worth $20 million, $30 million, $40 million." His reasoning is not snobbery. It is that the larger balance sheet "can weather the storm a little bit easier."

The profiles that come up repeatedly are business owners and real estate investors. Business owners because capital deployed back into a business they understand can return well above the loan cost, and because they often have a genuine death benefit need anyway: family protection, a buy-sell obligation, or estate tax exposure. Real estate investors because, as Kris puts it, they "already understand the leverage, they get it."

Alden's version of the same test: if a hundred thousand dollars put into his own business would return many times over, he does not want that money sitting in a policy. Financing is how someone in that position buys the coverage they need without starving the thing that actually compounds.

How this relates to The And Asset

People conflate the two constantly, and the difference is one thing: whose capital does the leverage come from.

Premium financing uses a bank's money to pay your premiums. The And Asset uses your own policy's cash value as the capital base you borrow against. Cousins, not twins. One brings an outside lender with covenants, collateral calls and renewal dates into your plan. The other does not.

Someone once described premium financing as infinite banking squared, and the instinct behind that is right even if the label is loose. Nelson Nash's original point holds underneath both: you either pay interest to outside lenders or you lose the opportunity cost of capital sitting idle. Financing simply answers that with a bank instead of with a policy you already own.

Which matters because the unleveraged version is available to far more people, and it carries none of the failure modes on this page. Start there and add leverage later if the estate case genuinely demands it.

What about guaranteed universal life

It comes up because the estate need is often about certainty rather than growth, and guaranteed universal life is the cheapest way to guarantee a death benefit.

The problem is collateral. GUL is built to minimise cash value, which is exactly what a financed structure needs to secure the loan. A policy with almost no cash value gives the bank almost nothing to lend against, so the outside collateral requirement never falls away.

That makes GUL generally impractical to finance, and it is a useful test of the whole idea. If what you want is a guaranteed death benefit at the lowest cost and you can pay for it, buy it and skip the bank. Financing only earns its complexity when the policy is building real cash value.

Four ways to fund a large insurance need

Whole life or indexed universal life

Almost every financed case sold in the last decade used indexed universal life, and the reason is arithmetic rather than conviction. A higher illustrated crediting rate makes the spread over the loan look wider, and a wider spread makes the whole plan look inevitable.

The trouble is which parts of that number the carrier controls. Caps and participation rates are adjustable, and case two above is what happens when they move: a policy sold at a 14.5% cap running at 6.5% years later, with the client still holding a plan built on the first figure. A zero year, which an indexed policy can produce, still costs you a full year of loan interest.

Whole life credits a dividend instead. Alden makes the distinction plainly: on whole life the cash value is guaranteed to grow, while indexed policies are more complicated because of caps and floors. Kris calls the dividend the wild card, and notes it moves year to year and can lag interest rates.

Neither is the right answer in every case. The point is that a structure resting on the friendlier of two crediting stories has less room in it, and room is the thing you want when the loan reprices.

How the loan itself is structured

Two details that people sign without reading, and both change the risk materially.

The term. These facilities run one, three or five years and then renew. Renewal is where the bank re-underwrites and reprices. Clients frequently do not know which they have, and the difference between a one-year and a five-year commitment is the difference between repricing five times a decade and twice.

The guarantee. Some arrangements require a personal guarantee. That converts a loan secured by a policy into a loan secured by you. Ask, and get the answer in writing, because it rarely comes up unprompted.

Fees sit alongside both. Commitment fees on a large facility can run into the tens of thousands, and legal fees are separate. Kris had a commitment fee removed entirely in one of the cases above, which suggests they are more negotiable than they are presented as being.

What happens when it works

It would be dishonest to only describe the failures, because this strategy does work for the people it fits, and the masterclass is clear about what that looks like.

One case they describe is four business partners in a very successful company, in their late forties, expecting a large liquidity event in around a decade. They understood leverage, they had a genuine need for coverage, and they had a defined moment when the loan could be cleared. That is close to the ideal shape: real need, real balance sheet, real exit, and a timeline everyone agreed on at the start.

Another is the business owner who sells and suddenly has cash. Paying off the bank at that point, rather than borrowing against the policy to do it, leaves the death benefit intact instead of reduced. The structure gave them the option to wait for that moment rather than committing to an exit at the beginning.

That optionality is the underrated part. A well-built financed policy lets a family pay more or less in a given year, adjust the death benefit, and choose when to exit. Alden's framing is that you retain leverage of your own, rather than only handing it to the bank.

The red flags they name

"We can do it all in-house." Kris calls this a significant red flag. He does not know any insurance advisers who also practise law and accounting. These structures need an attorney, a CPA and an insurance adviser who talk to each other.

An adviser who paints a rosy picture of collateral. Collateral requirements fluctuate year over year, particularly under stress. Anyone who has not walked you through that in a bad scenario has not walked you through it.

An inexperienced agent selling it. Alden's point is that these plans have to be managed, and agents who pitch them without the infrastructure behind them leave clients stranded years later.

Nobody has told you the exit. If you do not know how the loan ends, you cannot tell whether you are on track. Starting without the end in mind is how people discover a problem in year seven.

Terms you signed without reading. Clients routinely do not know their commitment fees, their legal fees, whether they gave a personal guarantee, or whether their loan term is one year, three or five.

The estate case, and the gifting problem

The most durable use of this is estate planning, and the mechanism is worth understanding because it is the one thing financing does that nothing else does as cleanly.

A death benefit is income-tax-free but not automatically estate-tax-free. Large estates put the policy in an irrevocable trust so the proceeds sit outside the estate, which works and creates a second problem: money moved into that trust to pay premiums is a gift, and gifts consume the lifetime exemption, currently around fourteen million dollars per person and twice that for a couple.

On a policy with a million dollar annual premium, gifting the premium burns exemption fast. If a bank pays the premium instead, and the family only needs to cover interest, the gift is a fraction of the size. Kris's example: gifting fifty thousand of interest rather than the entire million.

Two cautions from the same discussion. If the trust cannot pay the interest, someone has to forgive it, and that forgiveness is itself a gift. And the loan principal is still owed, so it comes back into the estate at death unless the structure handles it. Get both modelled before anyone calls this simple.

The sequence they recommend

Their advice is to build the plan first and let insurance fill the gaps it cannot close on its own. Leading with the policy means you either buy far more than you need or not enough, and then you go through the whole process again.

One practical warning attached to that. Underwriting a large financed case takes six to nine months, and longer for the biggest policies. Health can change inside that window, and insurability is the one variable you cannot get back. Kris mentions a colleague who lost a client mid-planning. Plan carefully, but do not treat the timeline as unlimited.

What to ask before you sign

Drawn from what they say matters, in the order it matters.

Who is the lender, what index does the rate float against, and what is the spread? What is the commitment or renewal fee, and is it negotiable? What outside collateral is required in each of the first ten years, and what does that schedule look like if the policy underperforms? Is interest paid or capitalised, and what does the alternative cost? What are the current cap and participation rates, and has this carrier moved them before? What does the whole structure do on guaranteed values only? How does the loan end, and in what year? And who is reviewing this with me every year for the next thirty?

Kris's summary of the whole due diligence question is better than any checklist: "Make sure that you're dating first before you commit."

The alternative most people actually want

Strip the strategy back and the appeal is a large permanent policy without tying up the capital to pay for it.

An overfunded policy funded from cash flow gets you the tax treatment, access through policy loans, and a death benefit, with no bank, no collateral, no rate risk and no call. It is smaller. It is also durable, and nobody has to manage a loan facility for thirty years.

For the large estate with a real liquidity need and capital genuinely earning more elsewhere, financing earns its complexity. For everyone else it is a more fragile way to get less. Alden's own framing of the entry test is the one to hold onto: "If you don't have the liquidity to purchase the insurance policy you're looking at, and you're relying on somebody else to do that for you, that's a recipe for a lot of bad things to happen down the road."

The vocabulary, so nobody can hide behind it

Financed proposals arrive thick with terms, and the terms are where unfavourable details get parked.

SOFR. The benchmark most of these loans float against. An overnight rate, which means it moves every single day, and your loan cost moves with it.

Spread, or basis points. The bank's margin on top of the benchmark. A hundred basis points is one percent. The difference between SOFR plus 200 and SOFR plus 125 was worth a quarter of a million dollars in the first year on one of the cases above.

Collateral assignment. The instrument giving the bank rights over the policy. The carrier has to accept it, and it stays on the policy for the life of the loan.

Gap or outside collateral. Everything you pledge beyond the policy. Ask for the year-by-year schedule, not the year it is expected to disappear.

Capitalised interest. Interest added to the balance rather than paid. Protects cash flow, grows the balance, widens the gap.

Cap and participation rate. On an indexed policy, the ceiling on what you earn and the share of the index you get. Both adjustable by the carrier.

Low-point letter. The carrier's statement of the minimum cash value next year, which is what a conservative bank underwrites against rather than the illustration.

Commitment fee. Charged by some lenders for the relationship itself. Negotiable more often than it is presented as being.

If you are being pitched this right now

A short version of everything above, for someone with a proposal in front of them.

Establish first whether you want the insurance at all, independently of how it gets paid for. If the answer is no, the conversation is over and both of them say so plainly. If the answer is yes, work out whether you could pay the premium yourself in a bad year. If you could not, the conversation is also over.

Then look at the four assumptions rather than the summary. Ask what the plan does when the loan costs three points more and the policy credits its minimum, because that combination is not exotic, it is just two ordinary things happening at once.

Then ask who is watching it. Not who sold it. Who is sitting down with you every year for the next thirty, and what happens to that arrangement if they retire or leave the business.

If those three answers are solid, the mechanics on this page are worth learning properly and the masterclass is the place to do it. If any one of them is soft, the honest recommendation is the boring one: buy a smaller policy you can pay for, and keep the bank out of it.

Frequently Asked Questions