Premium Finance (IUL & VUL)
How It Works & Structural Risks
The client borrows premium money from a private bank at a floating rate (e.g., SOFR + Spread). The loan proceeds fund an accumulating, max-funded IUL or VUL policy. The cash value inside the policy serves as the primary collateral, alongside secondary personal collateral (like marketable securities or a Letter of Credit) provided by the client to cover any shortfalls.
Critical Risks & Market Fluctuations
- Interest Rate Risk: If SOFR increases dramatically, the loan interest cost outpaces the index crediting rate of the policy.
- Collateral Call Risk: If equity markets drop and an IUL hits its 0% floor or a VUL loses value, the cash value will not keep pace with the loan balance. The client must post immediate cash or securities to cover the gap.
- Cap Compression: Life insurance companies can lower the caps on their index strategies during low-yield environments, reducing policy growth.
Prototypical Applicant
- Net worth exceeding $5 million to $10 million.
- Demonstrated need for permanent life insurance for estate tax or business planning.
- Highly liquid investments generating a higher rate of return than the cost of borrowing (positive arbitrage).