Premium Financing: Buying $50M Coverage with “Zero” Cash
Tax Tips / Insurance Leverage
Premium Financing: Buying $50M Coverage with “Zero” Cash
💡 Executive Summary
- Problem: You need a massive ILIT policy (e.g., $5M/year premiums) to pay Estate Tax, but you don’t want to liquidate high-yield assets to pay for it.
- Solution: Borrow the premium from a bank (Premium Finance) and let your assets keep growing.
- Result: You capture the “Arbitrage” between your asset growth rate and the loan interest rate.
⚠️ COLLATERAL RISK
This is a leveraged strategy. If the policy performance drops or loan interest rates spike, the bank will demand more collateral (Cash Call). You must have sufficient liquid assets to cover this risk.
This is a leveraged strategy. If the policy performance drops or loan interest rates spike, the bank will demand more collateral (Cash Call). You must have sufficient liquid assets to cover this risk.
Why use your own money to pay premiums when banks are willing to lend it? Premium Financing is the tool of choice for UHNW families (Tier L3+) who understand the “Opportunity Cost” of money.
🧐 Core Concept: Arbitrage
If your portfolio grows at 8% and you can borrow from a bank at 5%, why sell the portfolio? By borrowing the premium, you keep the 3% spread (Arbitrage) on your balance sheet.
If your portfolio grows at 8% and you can borrow from a bank at 5%, why sell the portfolio? By borrowing the premium, you keep the 3% spread (Arbitrage) on your balance sheet.
Performance Simulation
Net Worth Impact ($20M Premium over 10 Yrs)
Self-Funded (Sell Assets)
Assets Liquidated = Growth Lost
$30M Opportunity Cost
Financed (Bank Loan)
Assets Kept = Growth Retained
Wealth Preserved
Risk vs. Reward Profile
| Scenario | Self-Funded | Premium Financed |
|---|---|---|
| Liquidity | Drained (Cash Out) | Preserved (Cash In) |
| Gift Tax | High Use of Exemption | Minimal Use (Interest Only) |
| Interest Rate Risk | None | High (Floating Rates) |
“Wealthy families don’t buy life insurance to get rich; they buy it to stay rich. And they don’t pay for it with their own cash if they can use the bank’s.”
🔗 Related BMT Playbooks (Internal)
🛡️ The Container: ILIT (Must hold the policy) ⚖️ The Vehicle: PPLI (Can be premium financed) 📉 The Limit: Gift Tax rules for interest payments🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 7872 (Below-market loans) 📉 Data: Secured Overnight Financing Rate (SOFR) 🏛️ Banking Regs: Interagency Guidance on Leveraged Finance
BMT designs for tax reality, not theory.