Premium Financing: Using the Bank’s Money to Buy Insurance
Tax Tips / Leverage
Premium Financing: Using the Bank’s Money to Buy Insurance
💡 Executive Summary
- Problem: You need a $50M life insurance policy for estate tax liquidity (ILIT), but the annual premium is $2M. You don’t want to sell assets (and trigger capital gains) to pay this.
- Solution: Use Premium Financing. A bank lends you the $2M premium annually. You only post collateral.
- Result: The policy’s cash value grows faster than the loan interest (Arbitrage). Upon death, the benefit pays off the bank loan, and the surplus goes to your heirs tax-free.
⚠️ INTEREST RATE RISK
This strategy relies on “Positive Arbitrage” (Policy Return > Loan Interest Rate). If interest rates spike (like in 2023) or the policy underperforms, you may face a Collateral Call, forcing you to inject massive amounts of cash to save the deal.
This strategy relies on “Positive Arbitrage” (Policy Return > Loan Interest Rate). If interest rates spike (like in 2023) or the policy underperforms, you may face a Collateral Call, forcing you to inject massive amounts of cash to save the deal.
Why use your own money when you can rent it? For High-Net-Worth individuals (Tier L3+), liquidity is precious. Premium Financing allows you to acquire massive death benefits and tax-free cash accumulation without liquidating your high-performing stocks or real estate. It is the ultimate application of the “Other People’s Money (OPM)” principle.
🧐 Core Mechanic: The Spread
Loan Cost: SOFR + 1.5% (e.g., 5.0%)
Policy Growth: S&P 500 Index Participation (e.g., 7.5% avg cap)
The Arbitrage: If the policy grows at 7.5% and the loan costs 5.0%, you are making 2.5% on money you borrowed. That compound growth pays for the insurance itself.
Loan Cost: SOFR + 1.5% (e.g., 5.0%)
Policy Growth: S&P 500 Index Participation (e.g., 7.5% avg cap)
The Arbitrage: If the policy grows at 7.5% and the loan costs 5.0%, you are making 2.5% on money you borrowed. That compound growth pays for the insurance itself.
Performance Simulation
Out-of-Pocket Cost ($50M Policy)
Self-Funded (Cash)
$20M Total Cash Outflow
Your Money Gone
Premium Financed
~$2M Interest Cost (or $0*)
Leverage Magic
Who Qualifies? (The Barrier to Entry)
| Requirement | Standard Insurance | Premium Financing |
|---|---|---|
| Net Worth | No minimum | $10M+ (Usually $30M+) |
| Collateral | None | Liquid Assets Required |
| Exit Strategy | Cancel or Die | Loan Repayment Plan |
“If you have $50M, you don’t need life insurance for the money. You need it for the liquidity to pay estate taxes. Financing that liquidity is cheaper than selling your assets.”
🔗 Related BMT Playbooks (Internal)
🛡️ The Product: Financing PPLI for max growth ⚖️ The Concept: SBLOC vs. Premium Finance (Same logic) ✅ The Vessel: Holding the policy in an ILIT to avoid Estate Tax🏛️ Institutional Resources (External)
📘 Forbes: The Wealthy’s Guide to Premium Finance 🏛️ Concept: Financial Leverage Explained ⚖️ Regulation: Truth in Lending Act (Loan Disclosures)
BMT designs for tax reality, not theory.