Life Insurance Premium Finance  

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• Life insurance premium financing involves borrowing funds from a third-party lender (like a bank) to pay for a large life insurance policy instead of liquidating personal or business assets.

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Loan Structures

• Interest-Paying vs. Accruing: In some structures, the borrower pays the accruing loan interest out-of-pocket annually. In others, the interest is capitalized (added to the total loan balance), though this requires posting extra collateral to cover the growing debt.

• Term and Multi-Advancing Loans: These usually operate on 1- to 5-year or 5- to 10-year terms using variable benchmarks like the Secured Overnight Financing Rate (SOFR) or the Prime Rate.

• The Exit/Transition Structure: After several years, when the policy's cash surrender value grows large enough, the external bank loan is typically refinanced or replaced by a policy loan directly from the insurance carrier.

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Primary Use Cases

• Estate Tax Liquidity: High-net-worth families (often using an Irrevocable Life Insurance Trust or ILIT) fund massive death benefits to pay future estate taxes without selling off real estate or privately held business assets.

• Business Continuation: Business owners use premium financing to fund buy-sell agreements while keeping vital cash flow free to reinvest in daily company operations.

• Arbitrage Opportunities: Wealthy clients utilize this strategy when the projected internal rate of return of the policy's cash value outpaces the borrowing interest rate charged by the bank.