10 Reasons to Avoid Premium Financing for IUL

Premium financing for Indexed Universal Life (IUL) policies is often marketed by banks as a way for high-net-worth individuals (HNWIs) to leverage borrowed funds instead of paying premiums directly. While a premium finance strategy may appear attractive, it carries significant risks that can lead to financial losses, tax liabilities, and even policy lapses.

From rising loan interest rates and strict collateral requirements to margin call risks and reduced death benefits, premium financing can quickly become a financial burden instead of a wealth-building tool.

Before committing to a premium-financed IUL, it’s important to understand the potential pitfalls. Below, at Capital for Life we explore 10 major reasons why premium financing an IUL is a bad idea and why a multi-pay IUL is a smarter alternative.

Why Premium Financing an IUL is a Bad Idea: 10 Risks You Need to Know

1. Uncertain Interest Rates & Rising Costs‍

While financing rates may seem attractive today, interest rates fluctuate over time. If rates increase, the cost of borrowing rises, making it difficult to maintain the loan and threatening the financial sustainability of the policy.‍

2. High Administrative & Setup Cost

‍Setting up a premium financing structure involves legal fees, lender charges, structuring fees and administrative costs, making the process expensive compared to simply funding the policy directly.

‍3. Collateral & AUM Requirement

‍Lenders often require assets under management (AUM) or cash deposits to secure the bank loan, tying up capital and reducing liquidity. This can make it difficult to allocate funds for other investment opportunities.‍

4. Margin Call & Loan Recapture Risk

‍If the market shifts, lenders may demand additional collateral through margin calls, forcing the policyholder to inject more cash or risk losing control over the policy. Some lenders may even recall loans unexpectedly, leading to financial instability.

5. Policy Collateralisation & Bank Control

‍Premium-financed IUL policies are often used as collateral, meaning the lender has partial control over the policy’s cash value. If financial conditions change or loan terms aren’t met, the bank could seize control of the policy.‍

6. Compounding Interest & Loan Repayment Burden

‍If loan interest is not paid annually, it compounds over time, significantly increasing the total debt owed. This repayment burden can create long-term financial strain and limit liquidity.‍

7. Policy Performance & Lapse Risk‍

If the IUL policy underperforms or loan interest rates rise, the loan balance may exceed the policy’s cash value, potentially causing the policy to lapse and leaving the policyholder without coverage.

8. Reduced Death Benefit for Beneficiaries‍

With premium financing, any outstanding loan balance is deducted from the death benefit, meaning heirs receive a much smaller payout than initially planned.‍

9. Tax & Compliance Risks‍

If a financed IUL policy lapses or is surrendered with a remaining loan, the forgiven debt can be taxed as income, creating an unexpected tax liability for the policyholder.‍

10. Better Alternatives Exist‍

A multi-pay IUL eliminates financing risks while offering lower costs, no loan obligations, no collateral requirements, and no reliance on lender approvals. It provides full control over policy cash value and ensures financial flexibility. Having no debt against the policy also means it can be used for other financial planning strategies like providing an IUL for retirement income or using policy loans to buy property or support a business venture.

Conclusion‍

While premium financing for IUL may seem like an appealing strategy, the risks often outweigh the benefits. Rising interest rates, lender control, and policy lapse risks make it an unreliable long-term solution.

A multi-pay IUL offers a far superior alternative, providing policyholders with lower costs, greater financial flexibility, and full control over their life insurance investment.

Capital for Life Recommends: Before committing to a premium-financed IUL, consider whether a multi-pay approach would better align with your financial goals, without the hidden risks of financing.

‍Looking for a better way to fund your IUL? Contact us today to explore how a multi-pay IUL can help you build long-term wealth without the risks of premium financing.

Disclaimer

This article is authored by Carlton Crabbe, Chief Executive Officer of Capital for Life, a specialist indexed universal life insurance broker. The information provided in this article is for educational and informational purposes only and should not be construed as financial or investment advice. While the author possesses expertise in the subject matter, readers are advised to consult a qualified financial advisor before making investment decisions or purchasing life insurance products.