High-net-worth families often face a challenge: they need large amounts of life insurance to cover future estate taxes, equalize inheritances, protect illiquid assets, or support long-term wealth transfer plans—but they do not want to liquidate investments, sell real estate, or interrupt their financial strategy in order to pay the premiums. This is where premium financing becomes a powerful estate planning tool.

At Diversified Insurance Brokers, we help affluent clients structure and evaluate premium financing designs that support intergenerational wealth strategies while protecting liquidity. Premium financing is not for everyone, but for qualified households with the right financial profile, it can create leverage, tax-efficient protection, and long-term planning flexibility.

This guide explains how premium financing works specifically in the context of estate planning, when it may be appropriate, what risks to understand, and how families can evaluate whether it fits their long-term goals. If you’re exploring advanced planning concepts—such as irrevocable life insurance trusts, wealth preservation strategies, and funding future estate tax obligations—this overview is designed for you.

What Is Premium Financing in Estate Planning?

Premium financing is a strategy where a client uses a third-party lender to pay premiums on a large life insurance policy—usually a permanent policy such as indexed universal life (IUL), whole life, or guaranteed universal life (GUL). Instead of paying the premium out of pocket, the client posts collateral for the loan while the policy accrues cash value and long-term benefits.

For estate planning, this strategy is commonly paired with an irrevocable life insurance trust (ILIT) to keep the policy outside the taxable estate. The goal is to obtain large death benefits—often multi-million-dollar policies—without disrupting the client’s investment portfolio or creating liquidity strain.

Why High-Net-Worth Families Use Premium Financing

Premium financing is most valuable when clients face one or more estate planning challenges:

• Large future estate tax liabilities. High-net-worth estates often use life insurance as a strategic way to provide tax-efficient liquidity.
• Illiquid wealth. Families who hold real estate, operating businesses, or concentrated equity positions may not want to liquidate assets to pay premiums.
• Desire to maintain investment growth. Clients may prefer keeping capital invested rather than tying it up in policy funding.
• Intergenerational wealth strategies. Life insurance is often used to equalize inheritances or support family business continuity.

Premium financing allows these families to acquire the necessary coverage without disturbing the core financial plan—while maintaining flexibility and potential leverage.

How the Structure Works

Estate-focused premium financing usually includes four components:

1. The Insurance Policy: Typically a permanent product with long-term guarantees or strong cash value performance.
2. The ILIT: An irrevocable trust holds the policy, keeping the death benefit outside the taxable estate.
3. The Lender: A bank or specialty lender loans premium payments each year.
4. The Collateral: Provided by the client until the policy’s cash value is sufficient.

This design reduces the client’s out-of-pocket cost, defers when (or if) the loan must be repaid, and allows the policy’s leveraged structure to amplify the eventual estate benefit.

Step-by-Step: How Premium Financing Supports Estate Planning

1. The ILIT Is Established

The client creates an irrevocable trust that will own the life insurance policy. Because the trust owns the policy—not the insured—the death benefit is excluded from the taxable estate. This is a cornerstone of advanced estate tax planning.

2. The Trust Applies for Life Insurance

The ILIT becomes the applicant, owner, and beneficiary of the policy. This keeps the structure clean and compliant, while providing clarity about where the death benefit will flow.

3. The Lender Funds the Premiums

Each year, the lender advances premium payments to the insurance company. This allows the client to acquire large policies—sometimes $5M, $10M, or more in death benefit—without sacrificing investment liquidity.

4. The Client Provides Collateral

Until the policy accumulates cash value, the client posts collateral. This can be marketable securities, cash, or other qualifying assets.

5. The Policy Builds Value

Depending on the product type, the policy may grow cash value through fixed interest, index crediting, or dividend accumulation. This value plays a key role in reducing future loan exposure.

6. Loan Resolution Occurs Later

There are multiple options for resolving the loan:

• Pay interest only and leave principal outstanding
• Use policy cash value to pay down the loan
• Liquidate outside assets at an optimal future time
• Leave the loan outstanding until death, with the death benefit settling the balance

This flexibility is one of the core reasons the strategy is so attractive to affluent households.

Risk Factors to Understand

Premium financing is beneficial—but complex. Key risks include:

• Interest rate risk: If rates rise significantly, loan costs may increase.
• Policy performance risk: Underperforming cash value may require additional collateral.
• Collateral call risk: If marketable securities fall in value, collateral may need adjustment.
• Liquidity risk: Clients must be able to support collateral requirements long-term.

A well-designed strategy includes stress testing, scenario analysis, and conservative assumptions.

Premium Financing vs. Paying Premiums Out of Pocket

Paying premiums directly is often simpler—but for large estate planning cases, the financing approach may offer significant advantages:

• Preserves capital for investing or business operations
• May reduce gift tax exposure when the ILIT receives premium funds
• Provides leverage by using the bank’s capital instead of your own
• Increases long-term estate liquidity without requiring asset liquidation

For high-net-worth clients, the opportunity cost of tying up millions in policy premiums is often higher than the cost of using financing.

Policies Commonly Used in Estate Planning Premium Financing

Most estate planning strategies use:

• Indexed Universal Life (IUL): Flexible design, cash value growth potential, widely used in financed cases.
• Whole Life: Predictable performance, high guarantees, ideal for conservative risk profiles.
• Guaranteed Universal Life (GUL): Lower cash value but strong death benefit guarantees.

The right product depends on the family’s objectives, liquidity profile, and estate timeline.

Who Premium Financing Is Best Suited For

Premium financing is appropriate for clients who:

• Have a net worth of approximately $5M–$10M or more
• Have strong cash flow and financial stability
• Need a large death benefit for future estate planning
• Have assets suitable for collateral
• Can tolerate long-term interest rate and market fluctuations

It’s not ideal for clients with limited liquidity, low tolerance for financial risk, or those who cannot maintain long-term collateral support.

How Diversified Insurance Brokers Helps

Our advisors help clients with:

• Side-by-side illustrations comparing financed vs. non-financed designs
• Stress testing of interest rates, market cycles, and policy performance
• Coordination with lenders and estate planning attorneys
• Annual reviews to keep your strategy aligned with your estate plan

Premium financing is a sophisticated tool—but when structured properly, it becomes a powerful estate planning solution that protects families, reduces future taxes, and preserves long-term wealth.