Premium financing life insurance can be a powerful tool for high-net-worth families, business owners, and professionals who want large permanent policies without writing large premium checks each year. But like any leverage strategy, it comes with trade-offs. Understanding the pros and cons of premium financing is essential before you commit.

At Diversified Insurance Brokers, we help clients compare premium financing against more traditional strategies like split dollar life insurance, advanced life insurance strategies the wealthy use, and straightforward permanent coverage funded out of pocket. We also break down core concepts in our guides on what premium financing life insurance is, how premium financing works for estate planning, and whether premium financing life insurance is safe. This page focuses specifically on the benefits and potential drawbacks so you can make an informed decision.

What Is Premium Financing in Simple Terms?

With premium financing, a bank or lender pays the premiums on a large permanent life insurance policy (often $5M, $10M, or more in coverage), and you repay the loan over time. The policy is usually:

• A high-cash-value permanent contract, such as indexed universal life or whole life
• Owned by an individual, trust, or business entity as part of a larger estate or business plan
• Structured to build substantial cash value over time, which can help support or repay the loan

Instead of liquidating investments or writing large checks, you use financing to spread the cost over time. For the right client, this can be an efficient way to:

• Fund large death benefits for wealth transfer and estate planning
• Preserve investment capital in businesses or portfolios
• Coordinate life insurance with tax and legacy planning strategies

On the other hand, if your financial situation changes, or assumptions about interest rates and policy performance don’t pan out, the strategy can become more expensive—or even impractical—over time. That’s why we encourage clients to review this page alongside traditional term life options and no-exam life insurance, to see whether financing is truly necessary.

Key Advantages of Premium Financing

1. Preserve Liquidity and Investment Capital

One of the biggest advantages is the ability to preserve your liquidity. Instead of redirecting cash from investments, real estate, or business operations, you let the lender fund premiums while you:

• Keep capital invested in your business or portfolio
• Maintain emergency reserves and opportunity funds
• Avoid large premium outlays during your peak earning or growth years

For families with significant estates, this can be especially attractive when coordinating with trust planning, business succession strategies, or multi-generational legacy plans.

2. Access to Larger Death Benefits

Premium financing can make larger death benefits feasible without overwhelming your cash flow. Instead of funding, for example, a $15M or $25M policy entirely out of pocket, you:

• Finance premiums through a structured loan
• Use the policy’s projected cash value and death benefit to support the strategy
• Protect a greater share of your estate for heirs, charities, or business partners

This is especially useful when the primary goal is estate liquidity—covering estate taxes, equalizing inheritances, or providing buy-sell protection for a closely held business—similar to the planning concepts outlined in our estate planning premium financing guide.

3. Potential Interest-Rate and Policy Performance Advantages

In many premium financing designs, the idea is that:

• The policy’s long-term internal performance (crediting rates, dividends, or index credits) may exceed the long-term borrowing cost, and
• The death benefit delivers significant leverage compared to total loan cost

When the gap between policy performance and borrowing cost is favorable, the strategy can be very efficient. It’s a similar concept to how we evaluate leverage and guarantees inside fixed indexed annuities and retirement income annuities, where long-term assumptions matter.

4. Coordinated Estate and Tax Planning

Premium financing is almost never used in isolation. It’s typically part of a coordinated estate plan that may include:

• Irrevocable life insurance trusts (ILITs)
• Business succession agreements or buy-sell planning
• Charitable strategies that rely on large death benefits
• Multi-generational wealth transfer designs

When aligned with these goals, financing can allow you to implement strategies that might otherwise be cash-prohibitive, while still leaving room in your plan for other needs like long-term care protection or mortgage protection with life insurance.

5. Flexibility in Exit Strategies

Well-designed premium financing structures include multiple exit paths, potentially allowing you to:

• Repay the loan with policy cash value at a target year (for example, year 10 or 15)
• Use outside assets if and when liquidity events occur
• Refinance or restructure the loan if rates or goals change
• Gradually “wean” the plan off financing over time

This flexibility is a core part of why some affluent households prefer premium financing over simply writing large premium checks for decades.

Key Disadvantages and Risks of Premium Financing

1. Interest-Rate Risk

The biggest risk in many premium financing structures is rising interest rates. If loan costs increase while policy performance remains the same—or underperforms projections—the strategy can become more expensive than planned. This may lead to:

• Higher out-of-pocket interest payments
• Additional collateral requirements
• Less efficient long-term outcomes

In our article on whether premium financing is safe, we cover how rate caps, fixed-rate options, and conservative assumptions can help manage this risk—but never eliminate it completely.

2. Collateral Requirements and Potential Calls

To protect the lender, premium financing arrangements require collateral. Usually, this includes:

• The policy’s cash value as primary collateral
• Outside liquid assets as secondary collateral

If policy values don’t grow as expected, or if loan balances increase faster than planned, the bank may require more collateral. For clients with substantial asset bases, this may be manageable; for others, it can create stress or force unexpected asset sales.

3. Complexity and Ongoing Maintenance

Compared to a straightforward level term policy bought online or a simple whole life contract, premium financing is complex. It requires:

• Annual reviews of loan terms, interest accruals, and policy performance
• Coordination with your advisor team (attorney, CPA, and insurance professionals)
• Ongoing documentation and communication with the lender

If you prefer a “set-it-and-forget-it” type of coverage or are more comfortable with no-exam simplified life insurance, this level of complexity may not be a good fit.

4. Suitability Limitations

Premium financing is not designed for small policies or for clients with limited liquidity. If your primary need is income replacement, debt coverage, or family protection in the $250,000–$2,000,000 range, then more traditional products—including instant decision term life and cost-effective no-exam term coverage—are usually a better starting point.

In other words, premium financing is not a shortcut for affordability. You still need the financial capacity to support the strategy if assumptions change.

5. Policy Performance Risk

Most premium financing designs rely on long-term projections of policy performance—crediting rates, index growth, or dividends. While projections are based on reasonable assumptions, actual results can differ. If:

• Policy crediting rates are lower than expected
• Market volatility impacts long-term index performance
• Dividends are reduced over time

then loan costs may outpace policy growth, requiring adjustments to premiums, loan structure, or exit plans.

When the Pros Outweigh the Cons

Premium financing may make sense when:

• You have substantial net worth and verifiable liquidity
• You have a clear need for large permanent coverage (estate taxes, business continuity, or legacy planning)
• You’re comfortable with leverage and long-term strategies
• You have a coordinated team of professionals helping monitor the plan

In these situations, financing can be an elegant way to implement the types of strategies we discuss in life insurance strategies the wealthy use and split dollar life insurance—without locking up large amounts of liquid capital each year.

When the Cons Outweigh the Pros

You may want to avoid premium financing if:

• Your net worth and liquidity are not clearly above the minimum thresholds lenders require
• You are uncomfortable pledging collateral or dealing with loan structures
• Your primary need is basic family protection, mortgage coverage, or income replacement
• You prefer simple, transparent, and exam-optional solutions like no-exam life insurance or term life insurance

For many families, a combination of traditional term life, permanent coverage for long-term needs, and possibly annuity strategies for retirement income (as outlined on our fixed indexed annuity education page) is more than sufficient.

How Diversified Insurance Brokers Helps You Evaluate Pros and Cons

At Diversified Insurance Brokers, we take a conservative, planning-first approach to premium financing. Our process typically includes:

• Reviewing your overall financial picture—assets, liabilities, cash flow, liquidity, and goals
• Clarifying the purpose of the coverage (estate planning, business protection, legacy, etc.)
• Comparing premium financing with out-of-pocket premiums and alternative designs
• Stress-testing scenarios for interest rate changes and policy performance
• Coordinating with your tax and legal advisors to ensure structural alignment

Our goal is not to “sell” premium financing, but to determine whether the pros clearly outweigh the cons for your specific situation. If they don’t, we’ll walk you through simpler, more traditional strategies that may better fit your risk tolerance and long-term plans.