Premium financing inverts the CVLI loan: instead of borrowing against an existing policy, you borrow to acquire one. A commercial bank — typically a private bank with a dedicated premium-finance desk — lends the annual premium directly to the carrier or to a trust, secured by the policy’s cash value and often by supplemental pledged collateral.
The structure is built for estate-tax planning at the top of the wealth scale. An estate exposed above the post-OBBBA $15 million / $30 million unified exemption needs liquid death benefit outside the estate to pay the tax bill; that liquidity typically comes from a large policy held inside an ILIT. Annual premiums on a $10 million policy can run $300,000–$500,000. Paying that out of pocket each year drains investment capital and rapidly consumes the annual gift tax exclusion when the household funds the ILIT. Premium financing leaves your capital invested at higher expected return and services only the loan interest — which the bank may capitalize or call for cash annually depending on the structure.
The structural risk. Premium financing is a long-duration interest-rate bet. If the policy’s projected internal rate of return exceeds the loan rate, the trust comes out ahead. If loan rates spike (as they did across 2022–2024) while policy returns disappoint, the arrangement can turn upside-down — cumulative interest owed exceeds the policy’s expected payout. Premium-financed policies sold during the low-rate era of 2018–2021 have generated lawsuits and IRS scrutiny as the rate environment turned.
The $20M-net-worth threshold. Premium financing makes sense only above roughly $20 million in net worth, with concrete estate-tax exposure, a sophisticated ILIT, and a banker who has underwritten dozens of these structures. Below that scale, complexity, banker fees, and collateral lockup overwhelm the benefit.