Premium Financing Is Back in the Conversation. Don’t Fall for the Traps.

When interest rates move, so does the financial planning chatter. And lately, with whispers that rates may start to come down, we’ve noticed a renewed buzz around one of life insurance’s most talked-about advanced strategies: premium financing.

If you’ve been in the business long enough, you’ve seen this before. Interest rates dip, and suddenly premium financing is the hottest idea in the room. And while it can be a powerful tool in the right circumstances, too many conversations skip past the hard truths and head straight for the sizzle.

Before you dust off that old pitch deck or green-light a client proposal, let’s take a step back and remember that premium financing done wrong can be worse than not doing it at all.

First, a Quick Refresher on Premium Financing

In simple terms, premium financing is when a client borrows money, often from a bank, to pay the premiums on a large life insurance policy. The policy itself, along with other collateral, secures the loan.

The appeal is obvious. The client preserves liquidity by not writing a series of large premium checks, while still securing significant life insurance coverage for estate liquidity, wealth transfer, or business continuity. The bank earns interest and gets collateral. The life insurance grows in value over time, ideally outpacing the cost of the loan.

It’s a straightforward concept on paper, but paper illustrations don’t always survive contact with reality.

The Allure, and the Problem, of “Free” Life Insurance

Where things get risky is when premium financing gets sold as a kind of financial magic trick. You’ve heard the line: “Borrow at X%, earn more inside the policy, and your out-of-pocket cost is minimal.” In other words, “free” life insurance.

This is the arbitrage story, and in certain historical windows, it looked attractive. But the reality is far more fragile. Interest rates change, policy performance can fall short of projections, and cost of insurance charges aren’t carved in stone. If the only thing making the math work is the spread between borrowing costs and illustrated returns, you’re balancing your plan on a knife’s edge. One bad year, or even one bad quarter, can shift the economics entirely.

We’ve seen clients blindsided when interest costs suddenly spike, forcing them to contribute more cash, pledge additional collateral, or exit the strategy under pressure. In those moments, “free” becomes very expensive.

The Stress Test Isn’t Optional. It’s the Whole Point.

The difference between a well-structured premium financing plan and a disaster often comes down to whether it was designed for sunny skies or for storms. This is where stress testing becomes critical.

A proper stress test doesn’t just ask “what’s likely?” but rather it asks “what could go wrong, and how bad could it get?” You model higher interest rates, lower policy returns, sudden collateral calls, and delays in your planned loan exit. Then you see if the structure still holds. If the plan collapses under those conditions, it’s not ready for the real world.

Think of it like engineering a suspension bridge. You don’t design for a calm day in June; you design for the January ice storm with hurricane-force winds. In premium financing, the equivalent of that storm is a combination of rising rates, market underperformance, and unexpected collateral requirements, all happening at once. If your plan can’t handle that, you don’t build it.

It’s Not “Set It and Forget It”

Another trap is treating premium financing like a one-and-done transaction. In reality, it’s a living strategy that needs regular care. Loan terms have to be renewed annually. Policy performance needs to be monitored and, if necessary, adjusted. Interest rates shift, collateral values fluctuate, and banks may change their lending appetite.

If a client wants to write a check once and never think about it again, premium financing isn’t the right fit. It works best for those who are comfortable with an ongoing relationship between their insurance plan, their bank, and their advisory team, year after year.

When It Works Best

The sweet spot for premium financing is a client who has strong credit, substantial liquid assets, and a legitimate need for a large death benefit, often $10 million or more. The liquidity need might be tied to estate taxes, a generational wealth transfer plan, or a business succession strategy.

These clients can comfortably service the loan interest without straining their lifestyle. They have enough collateral to support the bank’s requirements without pledging assets they might need in the short term. And most importantly, they have a clear, realistic exit strategy, such as a planned liquidity event, asset sale, or the use of accumulated policy cash value to retire the loan.

When to Walk Away

On the flip side, premium financing is a poor fit for clients with tight liquidity, volatile or concentrated collateral, or a death benefit amount determined more by “what the loan can buy” than by actual planning needs. If the whole plan hinges on keeping a perfect interest rate spread for the next 20 years, you’re setting up for disappointment.

And if there’s no clear exit strategy, just vague ideas about “figuring it out later,” the best advice is usually to walk away. The risks in these scenarios don’t just threaten the financing plan, they can threaten the broader estate and financial plan as well.

The Bottom Line: Proceed With Eyes Wide Open

Premium financing has been around for decades because, in the right circumstances, it works beautifully. But it has also left a trail of broken expectations when approached with too much optimism and not enough engineering.

With rates possibly heading down, the sales pitches are coming. You’ll hear about leverage, low out-of-pocket costs, and how “everyone” is doing it. Your job—and ours—is to cut through the marketing fog and make sure the plan works not just when conditions are ideal, but when they’re at their worst.

Because premium financing isn’t about free life insurance. It’s about solving complex planning problems with precision, discipline, and safeguards. When it’s built that way, it can be a brilliant tool. When it’s not, it can become a very expensive mistake.

If you’re considering premium financing, or are already in the process of exploring it, call us. We can help you structure and stress test it the right way.

And if you read this and started to worry about your premium financing plans, give us a ring - we'll do our best to course-correct and right the ship before it drifts too far off course.