Premium Financing

Premium financing is a strategy in which a third-party lender — typically a bank or specialty finance company — funds the premiums on a large permanent life insurance policy, with the policy itself (and often other collateral) serving as security. The policyholder pays interest on the loan, which is typically lower than the cost of paying premiums out of pocket. If the policy's cash value grows at a rate exceeding the loan interest, positive arbitrage is created. Premium financing is used primarily by high-net-worth individuals who want to preserve liquidity while obtaining significant permanent coverage. It is a complex strategy with substantial risks including collateral calls if policy performance lags projections.