Understanding Premium Financing: How It Works, and Where Stream Plan Fits

Premium financing is an advanced strategy that allows certain financially qualified individuals to use borrowed funds to pay life insurance premiums. It can help manage cash flow, leverage assets, and allows clients to access higher-return opportunities and purchase a significantly larger policy than they could with out-of-pocket funding.

This article provides an educational overview of how premium-financing loans work, the risks involved, and the differences between fixed and variable loan structures. It also highlights how a Stream Plan can benefit from features that simplify or de-risk the strategy. This information is for educational purposes only and does not constitute financial, tax, or legal advice.

How Premium-Financing Loans Work

Traditional premium financing works like this: a lender advances funds to cover all or part of life insurance premiums. The policyholder provides collateral, often cash, marketable securities, or other acceptable assets. Interest accrues on the loan, usually paid annually, though terms vary by lender. The loan is typically repaid using external assets, policy values, or other planned funding sources.

The main takeaway: Premium financing is not a way to avoid paying premiums, it is a cash flow and leverage strategy that requires careful planning and the ability to manage changing conditions. With a Stream Plan, many of these steps can be simplified: by using the policy’s built-in funding features and cash value flexibility, policyholders can reduce or avoid external loans, limit exposure to interest rate and collateral risks, and maintain more predictable premium funding over time.

Costs and Risks to Consider

Understanding the costs, risks, and loan options is key before using a premium-financing strategy. Most traditional loans are tied to a benchmark rate, such as SOFR, plus a lender spread, so interest costs can fluctuate and projections based on low rates may not materialize.  

Loans may also include fees, such as termination or exit charges, annual renewals, and administrative or collateral monitoring costs, which can affect long-term outcomes. Premium financing carries risks, including rising borrowing costs, declining value of pledged collateral, insurance values not performing as illustrated, and the possibility that the strategy may need to be adjusted or unwound earlier than planned.  

Loan structures can further influence risk: variable-rate loans may start lower but expose the borrower to interest rate increases, while fixed-rate loans offer predictable costs but often start higher.  

Stream Plan offers a different approach, by leveraging built-in policy funding and cash value flexibility, it can reduce or even eliminate the need for external loans, limit exposure to interest rate and collateral risks, and simplify ongoing monitoring, making the strategy more predictable and easier to manage.

Where Stream Plan Changes the Game

While traditional premium financing can be complex and risky, a Stream Plan offers features that reduce many of the typical hurdles:

• Built-in flexibility: a Stream Plan allows premium management and policy access that can reduce reliance on external loans.

• Lower risk exposure: By leveraging policy cash value growth or structured premium payments, a Stream Plan helps minimize collateral and interest rate risk. This approach lowers the effective borrowing rate and reduces performance pressure compared to paying entirely out of pocket.

• Simplified monitoring: Fewer external parties and administrative requirements make long-term oversight easier.

Questions to Ask Before Considering Premium Financing

• Do I have sufficient liquidity and collateral to support a traditional loan?

• Can I tolerate variable interest rates and potential loan costs?

• Would a Stream Plan’s structured funding simplify this strategy for me?

• Does this approach fit my long-term financial goals and risk tolerance?

Conclusion

Premium financing can be an effective tool when carefully planned and monitored, but it is not suitable for every client. For advisors and clients considering this strategy, the key is understanding how costs, risks, and loan structures work and evaluating alternatives like a Stream Plan that can reduce complexity and improve sustainability.

We’d love to hear your thoughts and if this is for you! Contact us at service@thestreamplan.com  

‍