The Leverage Play: Premium Financing Life Insurance
The Leverage Play: Premium Financing Life Insurance
Why liquidate high-performing assets to pay premiums? How UHNW families use bank leverage to fund 8-figure death benefits.
Executive Summary
- The Opportunity Cost: You need a $20M policy. The premium is $500k/year. Instead of pulling $500k out of your business (earning 20%), you borrow it from a bank at 6%. You keep your capital working for you.
- The Arbitrage: The borrowed money goes into the policy. Ideally, the policy’s credited interest rate (e.g., 7-8%) exceeds the bank loan interest rate (e.g., 6%). The policy literally pays for its own loan.
- The Exit: You don’t pay the loan back annually; you just pay the interest (or accrue it). At death, the massive death benefit pays off the bank loan first, and the remaining millions go to your heirs tax-free.
The “Collateral Call” Risk
Danger Zone: If interest rates spike (Loan rate > Policy growth), you face “Negative Arbitrage.” Or, if the policy underperforms, the bank may demand more collateral (Cash/Securities) to secure the loan. This is a strategy for those with deep liquidity reserves, not the faint of heart.
Mechanic: The Deal Structure
Bank Loan
Pays 100% Premium
Arbitrage
Growth > Interest
Collateral
Policy + Outside Assets
Net Estate
Benefit minus Loan
Simulation: $10M Policy (Self-Fund vs. Financed)
20-Year Net Worth Impact
| Feature | Self-Funded (Cash) | Premium Financed (Leverage) |
|---|---|---|
| Out-of-Pocket | 100% of Premium | Interest Only (or $0 if accrued) |
| Gift Tax | Uses Lifetime Exemption | Minimal (Only on interest) |
| Risk | Opportunity Cost | Interest Rate & Collateral Risk |
“Banks love lending to insurance policies because the collateral (Cash Value) is perfect. The wealthy love it because they get the coverage without liquidating their dynasty.”
Essential Resources
INTERNAL
BMT Playbooks