Premium Financing Isn't an Arbitrage Strategy. It's a Structure.
- Apr 7
- 5 min read
Premium financing is often introduced the same way.
A bank pays your premiums. The policy grows. The growth offsets the interest. You keep your capital invested elsewhere. The insurance, effectively, pays for itself.
It's a clean story. It's also an incomplete one.
Premium financing is not free insurance. It is a leveraged planning strategy built on a set of assumptions that have to hold over time. When they do, the outcome can be highly efficient. When they don't, the costs don't disappear but rather shift and show up somewhere else in the structure.
That distinction is where most of the confusion lives.
Earlier this year, Kris Stegall was invited to join Alden Armstrong of Better Wealth for a two-hour conversation on premium financing from first principles, including how it works, where it fits, and where it breaks. The full discussion is embedded below. What follows is a distilled version of the parts that matter most.
The Arbitrage That Isn't Free
The most persistent framing of premium financing is that it creates an arbitrage. Borrowed money funds premiums, policy performance covers borrowing costs, and the client preserves liquidity.
But the strategy only behaves that way under a specific set of conditions. Interest rates need to remain within a reasonable range. Policy performance needs to track close to projections. Insurance costs need to remain stable relative to assumptions. And the exit, the moment when the loan is repaid, needs to happen on something close to schedule.
That is not arbitrage. That is alignment.
Over a 10–20 year period, one or more of those variables will move. When they do, the structure adjusts. Sometimes that adjustment is manageable. Sometimes it requires additional capital, additional collateral, or a change in strategy midstream.
The issue is not that these outcomes are unusual. The issue is that they are often presented in conversation as unlikely. They're not.
The Four Variables That Actually Drive the Outcome
Every premium financing arrangement rests on four variables: policy performance, loan interest rate, cost of insurance, and exit timing and funding. When all four move favorably, the outcome looks like the illustration.
When one moves against you, the others absorb the pressure. If rates rise, the cost of carry increases. If policy performance lags, the internal funding gap widens. If insurance costs shift, the policy's efficiency changes. If the exit is delayed, the structure extends, and with it, the exposure.
This is why illustrations are not predictions. They are a starting point.
Well-constructed plans model what happens when one or more of these variables break in the wrong direction, and whether the balance sheet can absorb it. Poorly constructed ones assume stability and leave the rest unexamined.
The Exit Plan Is the Strategy
One of the most important questions in premium financing is usually asked too late. “How does the loan get repaid?”
There are only a handful of real answers. A liquidity event, such as a business sale, a distribution, or a recapitalization. Policy cash value structured to build aggressively enough to support repayment. Outside capital from other parts of the balance sheet. Or some combination of the three.
The answer to that question determines everything upstream, including how the policy is designed, how aggressively it needs to accumulate value, how the collateral is structured, and how much flexibility exists if conditions change.
A premium financing arrangement without a defined exit is not a strategy. It's a liability with a timeline.
Where It Actually Fits in Estate Planning
For families using premium financing as part of estate planning, the objective is usually to create liquidity outside the estate without disrupting the existing portfolio.
The policy is typically owned by an irrevocable trust. At death, the trust receives the proceeds and uses them to purchase assets from the estate or otherwise provide liquidity. When executed properly, the result is no forced sale of illiquid assets, preservation of the family's investment structure, and estate obligations met with dedicated liquidity.
Premium financing becomes relevant because it allows the insurance to be acquired without redirecting capital that may be deployed more efficiently elsewhere, in operating businesses, investment portfolios, or private opportunities. That is the value proposition. Not free insurance. Capital efficiency within a broader plan.
On Ongoing Management
One of the most consistent issues in existing premium finance arrangements is not how they were set up. It's that no one revisits them.
In one case discussed in the conversation above, the insurance policy itself was performing in line with expectations. On the surface, everything looked fine. The loan was not. The spread, the margin over the base rate, was materially above market for a client with a strong balance sheet and significant liquidity. The structure had simply never been re-marketed to other lenders.
When it was, the spread was reduced by 75 basis points. On a $30 million facility, that translated to approximately $250,000 per year in savings and close to $3 million over a decade, without changing the insurance policy at all. There was also an embedded annual fee in the original structure that had no relationship to the size or quality of the client relationship. That was eliminated entirely.
Nothing about that outcome required a new strategy. It required someone looking.
The Team Matters More Than the Product
Premium financing is not a product. It is a coordinated structure. At minimum it requires an independent insurance advisor experienced in financed designs, an estate planning attorney, a CPA managing tax reporting and implications, a lending institution, and a wealth advisor with full visibility into the client's balance sheet.
Each of those roles carries a distinct responsibility. When one is missing, or when multiple roles are collapsed into a single provider, blind spots develop that the structure itself cannot fix. If someone presents premium financing as a single-firm solution, it is worth asking how those functions are actually being handled. Because they are there, whether they are acknowledged or not.
Where the Conversation Should Start
If premium financing comes up, whether in a proposal, an existing arrangement, or a passing conversation, the right starting point is not "does this make sense?" It's four questions that actually determine the answer.
What is the objective? What does the balance sheet look like today and under stress? Which variable is most likely to move against us? And how, specifically, does this end?
Those questions determine whether premium financing is appropriate. The structure comes after.
A Final Thought
Premium financing can be a highly effective tool in the right situation. It can also become a slow-moving problem when it is entered into based on assumptions that no one revisits.
The difference is rarely the product. It is the design, the oversight, and the willingness to treat the strategy as something that evolves, not something that gets implemented and forgotten.
If you're evaluating a structure, or have one in place, the most useful next step is not a decision. It's a second look.
For families and advisors who want that second look, we're available for the conversation. Reach us at hello@robinglen.com, or reach Kris directly at kstegall@robinglen.com.
This article is for educational purposes only and does not constitute financial, tax, or legal advice. Premium financing involves material risks including interest rate risk, collateral requirements, policy performance risk, and the potential for out-of-pocket costs not reflected in initial illustrations. It is not appropriate for all clients or situations. Planning decisions should be evaluated in light of individual circumstances and in coordination with qualified legal, tax, and financial advisors.
