4 Reasons IUL is Best for Premium Financing

When it comes to premium financing, choosing the right life insurance product is critical. While every permanent life insurance policy has strengths and weaknesses, an indexed universal life policy stands out as the best fit for premium financing strategies.

Other types of permanent life insurance, such as whole life, guaranteed universal life, and traditional universal life, come with limitations that can increase risk or reduce efficiency when used with financing. An indexed universal life (IUL) policy, on the other hand, offers four unique advantages that make it the preferred choice for high-net-worth individuals and estate planning.

What is an Indexed Universal Life Policy?

Before we discuss the unique advantages of an indexed universal life policy in the context of premium financing, it’s essential to understand what it actually is.

An indexed universal life (IUL) policy is a type of permanent life insurance that offers a flexible way to build cash value over time. Unlike traditional life insurance policies, IULs are tied to a stock market index, such as the S&P 500, which can lead to potentially higher returns on the cash value component.

➡️ Want to learn more? Read our in-depth guide on Indexed Universal Life Insurance.

➡️ Looking for a complete breakdown of financing strategies? Visit our Premium Financing for Life Insurance article.

Quick Overview: Term vs. Permanent Life Insurance

There are two main categories of life insurance:

• Term Life Insurance – Low-cost protection that only lasts for a set period (e.g., 10, 20, or 30 years). Once the term ends, coverage expires or becomes prohibitively expensive. Term insurance also offers little in terms of tax advantages or wealth strategies.
• Permanent Life Insurance – Coverage that lasts for life, while also building cash value that grows tax-deferred. With premium financing, this cash value becomes a critical tool: it can help repay the bank loan, eventually leaving your trust irrevocable life insurance trust​ (ILIT) with a paid-up policy that continues to grow.

Because of its lifetime coverage and ability to build equity, permanent life insurance, specifically an indexed universal life policy, is the best choice for premium financing.

Why Policy Selection Matters in Premium Financing

Not every permanent life insurance product is designed to work well with premium financing. Each company sets its own underwriting guidelines, pricing, and performance expectations. An independent agent, like Abrams Insurance Solutions, can shop multiple carriers to help you secure an indexed universal life policy with competitive underwriting and favorable terms.

The difference matters: underwriting classifications can shift premium costs by 25% per class, potentially saving you hundreds of thousands of dollars when financing multi-million-dollar policies.

Drawbacks of Other Permanent Policies

Before highlighting why an indexed universal life policy is often the best choice, it helps to understand why other permanent policies may not work as well with premium financing.

Whole Life Insurance

Whole life is known for being safe and predictable, but it is also very rigid. Premiums must be paid on a fixed schedule, and you have little flexibility to adjust them if your financial situation changes.

The growth of the cash value is slow, typically in the 4% to 6% range, which is not always enough to keep up with the cost of borrowing. If returns are lower than the loan interest, the bank may require more collateral or additional payments from you. This makes whole life less efficient in a premium financing strategy.

Universal Life Insurance

Standard universal life policies offer more flexibility in premiums and death benefits, but they can be unpredictable. The cash value is tied to interest rates that may fluctuate frequently, which can result in significant swings in performance. Poor returns may result in the lender adjusting loan terms, which could increase your out-of-pocket costs or collateral requirements. For someone using premium financing, that level of uncertainty adds extra risk.

Guaranteed Universal Life (GUL)

GUL provides lifetime death benefit coverage at a lower cost. However, it builds little to no cash value. Since cash value is critical to paying down a premium financing loan, GUL often requires the borrower to provide nearly all of the collateral. This reduces the benefits of using financing in the first place.

Each of these policy types can serve a purpose for certain goals, but when it comes to combining life insurance with premium financing, they generally fall short. That is why most experts recommend focusing on an indexed universal life policy, which balances safety, growth, and flexibility.

The 4 Reasons an Indexed Universal Life Policy Works Best

Now that we’ve compared other permanent life insurance options, let’s explore the four key reasons why an indexed universal life policy stands out for premium financing:

1. Flexible Cash Value Growth Options

An indexed universal life policy gives you a choice in how the cash value inside the policy grows. You can place funds in a fixed account or in one or more indexed accounts.

• Fixed accounts provide steady and predictable growth. The insurance company sets the credited interest rate, which is tied to the insurer’s overall investment portfolio. This is a safer option for people who prefer stability and want to avoid market swings.
• Indexed accounts give you the chance to earn interest based on the performance of a market index, such as the S&P 500. The policy does not invest directly in the stock market but uses options to credit interest. This approach offers the potential for higher returns than the fixed account while still protecting against market losses.

Having both options means you can adjust your strategy over time to match your tolerance for risk, the amount of collateral required, and your long-term financial goals.

2. Compound, Tax-Deferred Growth

The cash value in an indexed universal life policy grows on a tax-deferred basis. This means that any interest credited to your account is not taxed while it remains in the policy. Over time, the growth compounds, which can make a significant difference in the policy’s value. Because of this compounding effect, the cash value can build quickly and help repay the premium financing loan within a typical 10-year timeframe.

3. Downside Protection with Guaranteed Floors

An IUL includes a built-in safety net called a guaranteed floor. Even if the stock market performs poorly, the policy guarantees that your cash value will not lose money. Most policies guarantee a minimum crediting rate between 0% and 1%. This feature locks in gains from previous years and protects your policy during downturns, which is especially important when a bank loan is tied to the performance of the policy.

4. Attractive Upside Potential

Although IULs have a cap on how much interest can be credited in a strong market year, those caps are often between 12% and 13%. This is considerably higher than the conservative growth rates found in whole life or standard universal life policies. The combination of a guaranteed floor and a competitive cap allows for both safety and strong growth potential. That balance is why lenders see indexed universal life policies as more reliable and efficient for premium financing.

Overall…

Together, these four features make an indexed universal life policy the most practical and strategic choice for premium financing.

Flexibility in growth options allows you to customize the policy. Tax-deferred compounding helps the cash value grow faster. Guaranteed floors ensure your account never loses value, and competitive caps give you the chance to benefit from strong market years. These benefits work in combination to create a stable, efficient, and growth-oriented strategy for high-net-worth individuals using premium financing.

The Bottom Line

If your goal is to make premium financing as effective and low risk as possible, an indexed universal life policy is the best tool available. It combines growth potential with safeguards that protect both you and the lender. Over time, the policy’s cash value can grow large enough to repay the loan, leaving you with a fully owned life insurance policy that continues to provide benefits for your estate and heirs.

Most financial experts recommend planning for a 10-year exit strategy with premium financing. The strong growth potential and safety features of an IUL make it much easier to reach this milestone compared to whole life or guaranteed universal life policies. In short, the IUL delivers the right balance of security, flexibility, and performance to make premium financing work for high-net-worth individuals.

Take the Next Step

Premium financing with an indexed universal life policy can be a powerful strategy, but it requires the right structure and the right team. At Abrams Insurance Solutions, we help you evaluate lenders, compare policies from more than 70 top-rated carriers, and design a plan that matches your long-term estate planning goals.

We are proud to partner with a premium financing consulting group that brings 27 years of experience in this specialized area. With access to more than 26 premium financing lenders, we can create the perfect combination for your estate, no matter how complex your needs may be.

📞 Call us today at (858) 703-6178 to discuss your estate planning goals. Our premium financing experts are happy to answer any questions and guide you through the process.