Premium Financing for Life Insurance

Premium financing is a strategy in which a third-party lender extends a full-recourse loan to pay premiums on a large permanent life insurance policy used for business purposes such as key-person coverage, buy-sell funding, or succession liquidity. The loan is collateralized by the policy's cash value and by additional pledged business or personal assets. Altus advises on structure; we are not the lender.

It is considered only when the business and its guarantors have substantial balance-sheet strength, liquidity beyond the pledged collateral, a coverage need large enough that paying premiums directly would disrupt working capital, and a multi-decade planning horizon. Lender suitability guidelines vary by institution and are not uniform; typical floors sit at substantial guarantor net worth with significant liquidity beyond the pledged collateral. It is unsuitable for most business owners and is not a default buy-sell funding mechanism.

The buy-sell agreement itself is drafted by your legal counsel and defines who buys what from whom at what trigger. Premium financing funds the premiums on the life insurance policies that provide the cash to execute that agreement on death, using either a cross-purchase or entity-redemption structure. We coordinate policy ownership, beneficiary designations, and loan collateral to align with the agreement your attorney drafts.

Generally no. Under IRC §264, interest on indebtedness incurred to purchase or carry life insurance is generally not deductible. A narrow exception under IRC §264(e) permits a deduction for interest on up to $50,000 of aggregate indebtedness per key-person insured, subject to a rate cap. Your tax advisor should confirm whether the exception applies to your specific facts; Altus does not provide tax advice.

IRC §101(j) requires that, before an employer-owned life insurance contract is issued, the employee receive written notice of the coverage, consent in writing to being insured, and be informed that coverage may continue after employment ends. Annual Form 8925 reporting is also required. If these requirements are not met, death benefits above premiums paid are includible in the employer's taxable income.

The principal risks are floating-rate interest risk on a SOFR-linked loan, lender re-qualification risk every three to five years with no right to renewal, collateral-call risk if pledged values fall below required coverage ratios, policy lapse and IRC §72(e) phantom-income risk if the loan cannot be serviced, an exit window that in practice tends to span a multi-year planning horizon the business does not fully control, and dependence on the carrier's claims-paying ability. These are described in full in the disclosure block below.

A sale event typically requires repayment or restructuring of the loan, transfer of the policy, or surrender — each of which carries tax consequences that should be modeled in advance with your tax counsel. IRC §101(a)(2) transfer-for-value rules can convert an otherwise income-tax-free death benefit into a partially taxable one if the policy is transferred to the wrong party. This is a planning question we help surface before the strategy is adopted.

Loan interest is typically variable and tied to SOFR plus a spread, so a rising rate environment increases the cash cost of carrying the loan. If the policy's non-guaranteed dividend or credited interest does not keep pace with loan cost, the loan balance can grow relative to policy value, potentially triggering collateral calls. Altus does not project or imply that policy performance will exceed loan cost.

Lenders require that the policy's cash value plus additional pledged assets exceed the loan balance by a coverage ratio set in the loan agreement. If pledged values decline or the loan grows faster than collateral, the lender can issue a collateral call demanding additional pledged assets or cash within a short window. Failure to meet a collateral call can result in forced policy surrender and loan acceleration.

Premium finance loans are typically re-underwritten every three to five years. At each re-qualification, the lender reviews the guarantor's financial condition, the policy's performance, and market conditions, and may change terms, demand additional collateral, or decline to renew. There is no contractual right to continued financing on current terms over the life of the policy.

Traditional funding pays premiums directly from business or owner cash flow, which is simpler, carries no loan-related risk, and is the right answer for most buy-sell situations. Premium financing trades that simplicity for the ability to keep capital deployed elsewhere, at the cost of floating-rate, re-qualification, and collateral-call exposure. We start with traditional funding as the default and only model financing where the profile clearly supports it.

Yes. If a collateral call is not satisfied within the contractual window, the lender can require policy surrender to repay the loan, accelerate the loan against the guarantor's other assets, or both. If the policy lapses while a loan balance exceeds basis, IRC §72(e) can generate phantom taxable income with no cash available to pay the tax. These outcomes are why suitability is narrow.