Life Insurance

Premium Financing

Premium financing is an advanced planning strategy used by high-net-worth individuals to purchase large permanent life insurance policies—often $5 million or more in coverage—by borrowing the annual premium from a bank or specialty lender at a competitive rate rather than liquidating assets.

Last reviewed: May 2026 · Editorial methodology

Definition

Premium financing allows an insured to leverage low-cost borrowed funds to pay life insurance premiums on a large permanent policy, typically indexed or variable universal life, with the expectation that the policy's internal rate of return will exceed the loan interest rate—creating positive arbitrage. The insured collaterally assigns the policy's cash value and death benefit to the lender to secure the loan, with additional collateral often required if the policy's cash value falls below a threshold. Loans typically carry interest rates of 1-month SOFR plus 100–250 basis points, which at 2026 rates translates to approximately 5.5–7.5% annually. A $20 million IUL policy with $500,000 annual premiums might be financed over 10 years with $5 million in cumulative borrowing; if the policy's indexed interest crediting averages 6.5% and loan cost averages 6.0%, the net benefit justifies the strategy. Premium financing is exclusively used by ultra-high-net-worth individuals—typically those with estates exceeding $10 million—as the complexity, collateral requirements, and risk of interest rate increases make it unsuitable for average consumers. Risks include lender exit from the market, interest rate spikes, policy underperformance, and the need to service or refinance the loan at maturity.

Where this term matters

Life Insurance →Insurance Companies →

Tip

Glossary definitions are educational. Always check your own policy language — insurers can define common terms differently from one another. When in doubt, request a written explanation from your agent.

Related terms

Indexed Universal Life (IUL)Indexed universal life insurance credits interest based on the performance of a market index such as the S&P 500, subject to a cap and a floor—typically 0%—so cash value cannot lose value due to index declines.Variable Universal Life (VUL)Variable universal life insurance combines the premium flexibility of universal life with investment sub-accounts similar to mutual funds, allowing cash value to grow—or shrink—based on market performance.Cash ValueThe savings component inside permanent life insurance policies that can be borrowed against or withdrawn.Split-Dollar Life InsuranceSplit-dollar life insurance is an arrangement in which two parties—typically an employer and employee—agree to split the premium payments, cash value, and death benefit of a life insurance policy according to a written agreement, often used as an executive benefit.Modified Endowment Contract (MEC)A modified endowment contract (MEC) is a life insurance policy that has been funded too rapidly—violating the IRS 7-pay test—causing it to lose the tax-preferred treatment that normally applies to policy loans and withdrawals, subjecting them instead to LIFO taxation and a 10% penalty.

Related guides

Source: Cover Forge USA editorial team|Last verified: May 2026|Methodology
Definitions are educational and may be simplified. Always refer to your policy contract and consult a licensed agent for terms that affect coverage decisions.
CF

Cover Forge USA Editorial Team

Editorial Lead

This article was researched and written by the Cover Forge USA editorial team against federal sources (NAIC, CMS, FEMA, DOL, SSA, state DOIs) and standard policy forms. Bylines organize content by topic — they do not assert individual licensure. See our editorial-policy for details.

Reviewed June 2026

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