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Premium Finance

Premium Finance

Strategy Overview

Many affluent clients understand the benefits that life insurance can provide. However, clients are often concerned that a substantial income tax liability will result from liquidating low-basis assets to pay premiums, and/or that buying life insurance will require them to redirect assets from potentially lucrative investments. In addition, the premium costs for the needed death benefit often exceed the client’s annual gift tax exclusion and remaining lifetime gift tax exemption amounts.1 As a result, many clients use premium leveraging arrangements, such as Premium Financing, Private Financing, and/or Private Split Dollar, to facilitate funding their life insurance premiums with little or no gift tax and/or cash flow impact.

What is Premium Financing?

Premium Financing is a strategy intended to assist clients in obtaining life insurance for which they have an established need. Typically, Premium Financing is a fair market loan arrangement between a commercial lender and an Irrevocable Life Insurance Trust (ILIT) where the lender lends the premiums for a life insurance policy on the client’s life to the ILIT.2 In that case, the gift to the ILIT is equal to the amount of loan interest charged, not the entire policy premiums. As a result, the client is able to acquire the death benefit needed with little or no gift tax impact.

How Does it Work?

  1. Client creates an ILIT, the beneficiaries of which are typically the client’s family members.
  2. ILIT borrows funds to pay the premiums due and collaterally assigns the policy to the lender. Loan interest may be paid annually or deferred for a period of time, depending on the terms of the loan.
  3. Client pledges additional assets as collateral. (Not on the chart)
  4. ILIT uses the loan proceeds to purchase a life insurance policy on the client’s life, retains ownership rightsand designates the ILIT as the beneficiary of the policy.3
  5. At the client’s death, the loan is repaid from the death proceeds. Alternatively, the loan may be repaid during the client’s lifetime in a lump sum or installments, from sources outside the client’s estate. Funds to repay the loan may include an ILIT side fund to which the client has contributed annual gifts that have been invested, or an existing trust or partnership that may have significant assets available.
  6. Death proceeds in excess of the amount required to repay the loan are distributed to the ILIT beneficiaries, estate and income tax free.

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  • Death benefit payable to the ILIT should pass to the trust beneficiaries, estate and income tax free.
  • Substantially reduce or eliminate gift tax cost associated with the client’s desired level of life insurance protection.
  • Reduced net out-of-pocket cost for the life insurance.
  • Minimal or no impact on the current investment portfolio: client maintains use and control over assets that otherwise would have been liquidated to pay life premiums.

Potential to leverage the client’s investment portfolio when the portfolio returns are higher than the cost of the loan.


  • Premium Financing is complex and involves many risks, such as the possibility of policy lapse, loss of collateral, interest rate and market uncertainty, and failure to re-qualify with the lender to keep the financing in place and maintain the desired level of insurance protection.
  • Subject to the lender’s collateral and financial underwriting requirements.
  • Loan interest paid by the ILIT is not deductible.
  • ILIT assets may be insufficient to pay the premiums, loan interest, and/or repay the lender.
  • Pledged collateral and, in certain circumstances, additional out-of-pocket contributions to the ILIT, may be required to retire the debt and/or maintain the desired level of insurance protection.
  • A well-planned exit strategy should be in place from the beginning.

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