Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Wealthy Families Use Insurance Premium Financing
Transcript
- Lucas: Luna, you know the classic financial advisor line — 'buy term and invest the difference.' Luna: Oh, I've heard it a hundred times. Term insurance for pure protection, invest the rest in the market. Lucas: Right. But there's a completely different playbook for ultra-high-net-worth families, and it flips that logic on its head. They use permanent life insurance — whole life or universal life — and they don't even pay the premiums out of pocket. Luna: They finance the premiums. That's the strategy — insurance premium financing. Lucas: Exactly. Instead of writing a check for a million-dollar annual premium, they borrow the money from a bank. They pledge collateral — securities, real estate, other assets — and the bank pays the insurer. The policy's cash value grows, and over time, it's supposed to outpace the interest on the loan. Luna: So the family keeps their capital deployed in their core investments — private equity, real estate, whatever — while still getting the death benefit and the tax-deferred growth inside the policy. Lucas: That's the core idea. Let me give you a concrete example. Say a 60-year-old wants a $10 million death benefit. A typical universal life policy might require an annual premium of $200,000 for ten years. Instead of paying $2 million out of pocket, they take out a loan at, say, 4.5 percent interest. They pledge $2 million in marketable securities as collateral. Luna: And the bank pays the $200,000 each year directly to the insurance company. Lucas: Correct. Now, inside the policy, the cash value earns a crediting rate — maybe 5 to 6 percent in a whole life policy from a top mutual insurer. So the spread is positive. The cash value is growing faster than the loan interest. When the insured passes away, the death benefit pays off the loan balance, and the remainder goes to the beneficiaries — often through an irrevocable life insurance trust, so it's estate-tax-free. Luna: What about the interest payments — are they out of pocket? Lucas: In many structures, the interest accrues. You don't pay it annually. The loan is non-recourse to the borrower, meaning the bank's only recourse is the collateral and the policy cash value. So the family has no out-of-pocket cash flow at all during the insured's lifetime. Luna: That's powerful. But it's not without risk. What if the policy's crediting rate drops below the loan interest rate? Lucas: That's the big one. In a falling interest rate environment, if the insurer's portfolio yields decline, the crediting rate could slip. If it falls below the loan rate, you get negative carry. Then the loan balance grows faster than the cash value. That can erode the death benefit over time, or even trigger a collateral call from the bank. Luna: And we've had a rising rate environment for a while, but as of July 2026, rates have stabilized. Still, you need a buffer. Lucas: Absolutely. Most advisors recommend stress-testing the policy with a 2 percent lower crediting rate than the current projection. If the policy still works, you're in decent shape. Also, the loan rate is often floating — tied to SOFR or the prime rate. So if rates spike, the cost goes up. Luna: There's also the collateral issue. If the value of the pledged assets drops — say, a concentrated stock position declines — the bank may ask for more collateral. Lucas: Yes. That's why most banks won't accept volatile single-stock collateral. They want diversified portfolios or cash equivalents. And they'll typically lend 70 to 80 percent of the collateral value. So if you pledge $2 million, you might only get a $1.6 million credit line. Luna: So you need excess collateral to cover multiple years of premiums. Lucas: Right. A well-structured plan often involves a 'collateral pool' of maybe 2.5 to 3 times the annual premium. The family office manages that pool, and the bank monitors it quarterly. Luna: Give me a real-world example. Who uses this? Lucas: I know a family office in Chicago that set up a $50 million survivorship universal life policy on a married couple, both in their 70s. The annual premium was about $800,000. Instead of paying that, they financed it through a private bank. The collateral was a portfolio of municipal bonds and S&P 500 ETFs worth about $3 million. Luna: And the goal? Lucas: Estate liquidity. They had a large real estate portfolio that would be hard to sell quickly to pay estate taxes. The policy's death benefit, which is income-tax-free, would provide cash to the trust to pay the tax bill. And by financing the premiums, they kept the $800,000 per year invested in their core real estate business. Luna: So the return on that retained capital was probably higher than the loan cost. Lucas: Exactly. Their real estate IRR was in the low teens. The loan cost was maybe 5 percent. So they pocketed the spread. Luna: What about the tax treatment of the loan itself? Is there any imputed income? Lucas: Generally, no. The loan is a true debt obligation. Interest is not deductible for personal use, but if the policy is owned by a trust or a business, there can be some deductibility. But the main tax advantage is that the death benefit passes estate-tax-free if the policy is in an ILIT. And the cash value grows tax-deferred. Luna: Now, this is a finance show, and if our money conversations have helped you think about a decision differently, I want to mention something real quick. Lucas: Go ahead. Luna: A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds us making this many episodes — no ads, no sponsors, just listener support. It keeps the show independent and lets us dig into niche strategies like this one. Lucas: Yeah, if you've gotten value from these conversations, that's the way to keep them coming. No pressure ever. And it means a lot that people find it worth supporting. Luna: Back to premium financing — Lucas, you mentioned the policy is often an ILIT. How does the trust affect the financing? Lucas: The trust is the owner and beneficiary of the policy. The bank lends to the trust, but the grantor — the wealthy individual — provides the collateral. The trust pays the premium with the loan proceeds. The grantor's estate doesn't include the death benefit, and the loan is repaid from the death proceeds. Luna: So the trust needs to be set up before the loan is taken out. And the trustee has to manage the loan agreement. Lucas: Right. The trustee is usually a trusted advisor or a corporate trustee. They sign the loan documents. The bank requires the trust to have a 'premium finance agreement' that outlines the terms. And there's an 'assignment of policy' — the bank gets a security interest in the policy itself. Luna: What happens if the insured lives longer than expected? The policy may need premiums for more years than planned. Lucas: That's a real risk. If the policy is a 'guaranteed universal life' with a fixed premium period, say 10 years, then after year 10, no more premiums. But if it's a flexible premium policy, the carrier may require additional premiums if the crediting rate drops. Some policies have a 'no-lapse guarantee' rider that keeps the policy in force even if cash value runs out, as long as the total premiums paid meet a minimum. Luna: So the structure has to be carefully engineered. Lucas: Absolutely. This isn't a DIY strategy. You need a good life insurance advisor, a tax attorney, and a bank that specializes in premium finance lending. The setup costs can be tens of thousands of dollars. But for families with $50 million plus, it can be very efficient. Luna: One thing I've seen — some advisors pitch premium financing as 'free life insurance' because the loan interest is supposedly offset by the policy growth. That's oversimplified. Lucas: Hugely oversimplified. There's real risk. If the policy doesn't perform, the family might need to inject cash. Or they could let the policy lapse, and then the loan becomes due — and they lose the collateral. The only 'free' scenario is if the policy crediting rate exactly matches the loan rate, which is unlikely. Luna: And the bank typically charges an origination fee, plus annual servicing fees. So the all-in cost is higher than the stated interest rate. Lucas: Yes. Origination fees can be 1 to 2 percent of the credit line. And the bank may require an annual review fee. So net of those, the break-even crediting rate might be 75 to 100 basis points above the loan rate. Luna: Given where we are in July 2026, with interest rates having stabilized after the hikes, are families still doing this? Lucas: They are, but more cautiously. Loan rates are around 5 to 6 percent now, compared to 3 percent a few years ago. So the spread is thinner. But insurers have also raised their crediting rates on new policies. Some top mutual companies are crediting over 6 percent on whole life. So the math can still work, especially for families who need the death benefit anyway. Luna: And the estate tax exemption is scheduled to drop at the end of 2025 — wait, that already happened. As of 2026, the exemption is around $7 million per person, down from $12 million. So more families face estate taxes. Lucas: That's a huge driver. A married couple with a $20 million estate now faces a potential tax bill of several million dollars. Life insurance funded through premium financing becomes a very attractive way to create liquidity without writing a big check today. Luna: So the strategy is gaining traction because of the tax environment. Lucas: Exactly. And with the higher interest rates, the insurance companies are actually more competitive on their crediting rates because their bond portfolios are yielding more. So the product itself is stronger than it was five years ago. Luna: What about using variable universal life where the cash value is invested in sub-accounts? That could offer higher growth. Lucas: It can, but it introduces market risk. If the sub-accounts drop, the cash value declines, and the loan to value ratio gets worse. The bank may not accept a VUL policy as collateral unless it has a fixed account option. Most premium finance deals use whole life or indexed universal life with a floor. Luna: So the conservative product is the standard. Lucas: Right. The bank wants predictability. They don't want the collateral to be volatile. So the policy needs to have a stable cash value growth path. Luna: One last thing — what if the borrower wants to exit the strategy early? Say they no longer need the policy. Lucas: They can surrender the policy. The cash value is used to pay off the loan, and any excess goes to the owner. But if the policy is in an ILIT, the trust controls that. And there could be surrender charges in the first 10 to 15 years. So early exit can be costly. Luna: So it's a long-term commitment. Lucas: It is. But for families with a genuine need for permanent life insurance — estate planning, business succession, key person coverage — premium financing can be a very elegant way to avoid tying up capital. It's not for everyone, but when it fits, it fits well. Luna: I think the key takeaway is to model the worst case. If rates go to 8 percent and crediting to 4 percent, can you still handle it? Lucas: Exactly. Stress test everything. And work with a team that has done this before. The biggest risk isn't the strategy itself — it's poor execution. Luna: Good advice. Thanks, Lucas. Lucas: Thanks, Luna.