GGM Wealth Advisors

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Premium financing, explained plainly

This page is educational. It exists because the strategy gets presented enthusiastically and explained poorly, and because the risks deserve equal billing.

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In one paragraph

Premium financing is borrowing from a third-party lender to pay premiums on a large life insurance policy, typically using the policy and additional collateral as security. It is used by high-net-worth individuals with a documented need for substantial permanent coverage who prefer not to liquidate other assets. Its outcome depends heavily on interest rates and policy performance.

The problem

Where these arrangements go wrong

The concept is straightforward. A large permanent policy carries a large premium; rather than paying it from your own capital, a lender pays it and you service the loan, with the policy and other collateral pledged as security.

The arrangement rests on assumptions stacked several deep. Interest rates stay within a workable range. The policy credits close to what was illustrated. Collateral requirements do not rise. Your liquidity holds for as long as the loan does. When rates rose sharply, a number of arrangements written in a low-rate era required more collateral and more out-of-pocket funding than the original illustration suggested.

None of that makes premium financing unsuitable in every case. It makes it a structure that requires an existing, documented insurance need, genuine balance-sheet capacity for the downside, and a willingness to review the arrangement every year for its entire life.

What we actually do

The work, item by item

  1. 01

    Establish the insurance need first, on its own

    If there is no clear reason for a large permanent policy without the financing, financing is not the reason to buy one. This is the question that ends most of these conversations.

  2. 02

    Stress the structure, not just illustrate it

    We look at higher rates, weaker policy performance, and increased collateral calls together rather than one at a time, since that is how difficulty actually arrives.

  3. 03

    Confirm collateral capacity honestly

    Lenders can require additional collateral if the policy underperforms. That capacity has to exist in a bad year, not only in a good one.

  4. 04

    Read the exit terms before entering

    How the loan unwinds, what triggers a demand, and what happens if you want out in year eight all belong in the conversation on day one.

  5. 05

    Bring your CPA and attorney in early

    These structures touch tax and estate planning directly, and they frequently involve a trust as owner. Both professionals should see the arrangement before it exists.

  6. 06

    Commit to an annual review

    An arrangement like this is not something you sign and file. If nobody is reviewing it each year, that is a reason on its own to decline.

Straight answers

Premium financing: common questions

Related

These usually come up alongside it

This material is for general educational purposes only and is not intended as tax, legal, or investment advice. Neither GGM Wealth Advisors nor Cambridge provides tax or legal advice. Please consult a qualified professional about your specific situation.

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