Premium financing can be an effective way to secure large amounts of life insurance while preserving liquidity. However, changing interest rates, policy performance, and long-term planning needs can turn a well-intentioned premium-financed policy into a growing financial burden.
When a premium-financed policy no longer makes sense to maintain, a life settlement may provide a strategic exit which offer liquidity and a path to unwind the structure rather than surrendering or lapsing the policy at a loss.
Premium-financed life insurance relies on multiple assumptions working together over time. When those assumptions change, pressure builds quickly.
Common challenges include:
Many premium-financed policies were structured during historically low interest rate environments. As rates rise, borrowing costs increase, often faster than anticipated in original projections.
Index caps, participation rates, or illustrated assumptions may not materialize as expected, slowing cash value growth relative to loan balances.
As loan balances grow or policy performance lags, lenders may require additional collateral, forcing clients to post assets they never intended to tie up long term.
What began as a short- to mid-term strategy may become uncomfortable as holding periods extend and exit timing becomes uncertain.
When premium-financed policies become unsustainable, clients typically consider three options:
This may require increasing collateral and absorbing higher interest costs, often compounding the original issue.
Surrendering frequently produces insufficient cash value to repay the outstanding loan, potentially triggering out-of-pocket losses.
Allowing a policy to lapse can leave loan balances unresolved and may create unexpected tax consequences.
In many cases, these options fail to preserve value or flexibility.
A life settlement introduces a fourth option, one that is often overlooked.
When a premium-financed policy qualifies, selling the policy on the secondary market may:
For certain cases, settlement proceeds may even exceed total premiums paid, depending on health, policy structure, and market demand.
Life settlements are frequently explored for premium-financed policies involving:
Policies with large face amounts and ongoing premium obligations are often better candidates for market evaluation.
Premium-financed life settlements require careful coordination.
Important factors include:
A settlement should never be evaluated in isolation. It must be analyzed alongside loan documents, trust agreements, and the client’s broader financial plan.
Tax treatment in premium-financed life settlement scenarios can be complex. Settlement proceeds may involve:
In addition, loan forgiveness or payoff may have tax consequences depending on structure and ownership. Coordination with tax and legal advisors is essential.
Living Equity Group does not provide tax or legal advice.
At Living Equity Group, we specialize in evaluating complex insurance structures including premium-financed policies with an objective lens.
Our process includes:
Our goal is clarity. Not to push one outcome over another.
A policy review is strongly recommended when:
In these cases, delaying action can increase financial strain.
Premium-financed life insurance can be effective. Though when conditions change, flexibility matters. A life settlement may provide a way to exit an underperforming structure while preserving value and liquidity.
Unsure whether a life settlement could help unwind a premium-financed policy?
We can review your policy and financing structure to help determine the most appropriate path forward.
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