If most of a business owner’s net worth sits inside a company they built, the hard part of buying life insurance is often not the decision. It’s the funding. Premium finance for companies exists to address exactly that tension. This guide explains how premium finance life insurance works for business owners, where it fits with key-person coverage, succession, and estate planning, and the risks and rules that should be visible before any decision is made.

TL;DR: Premium Finance Life Insurance at a Glance

• Premium finance life insurance is a borrowing arrangement used to fund premiums on a life insurance policy, secured by an interest in that policy, according to U.S. Bank’s overview of insurance premium financing and California Insurance Code definitions.
• Loan interest is often variable, based on Prime or SOFR, per U.S. Bank. For context, FRED data show SOFR at 3.62% on 2026-07-22 and Prime at 6.75% effective as of 2025-12-11.
• Buy-sell gaps are common: a Family Firm Institute précis reports 68% of owners lack a buy-sell agreement.
• Estate tax funding is a live issue: the IRS estate tax page lists a 2026 basic exclusion amount of $15,000,000, as confirmed in IR-2025-103.
• Employers with insured employees have reporting duties: If employer-owned life insurance policies are in effect on employees, employer-owned life insurance notice, consent, and reporting rules may apply (see IRS Notice 2009-48 and 26 CFR §1.6039I-1, including Form 8925). This is not legal or tax advice — an attorney or CPA can confirm what applies to your specific structure. 

Premium finance involves borrowing from a third-party lender. Interest-rate risk, lender risk, and policy-performance risk are all present. Not suitable for all clients. Consult your legal, tax, and financial advisors. Life insurance products are not securities or investment products. This is not investment advice.

What Is Premium Finance Life Insurance, and When Do Business Owners Use It?

Premium finance life insurance is a way to fund life insurance premiums by borrowing from a third-party lender rather than paying the full premium upfront. An interest in the life insurance policy itself typically secures the loan. U.S. Bank describes premium financing as an arrangement to pay premiums on a life insurance policy, and California statute defines a premium finance loan as one made primarily to pay life insurance premiums and secured by an interest in that policy.

Owners generally consider premium finance strategies when the need for coverage is real, but the premium is large enough that paying it from operating funds would strain the business. The point is not the loan for its own sake. The point is putting meaningful life insurance in force, whether for key-person protection, succession funding, or death benefit proceeds to help settle an estate, while funding premiums through borrowing rather than a direct outlay from the company. 

One myth worth retiring early: financing is not free. U.S. Bank flags the common belief that premium financing costs nothing because a loan can be fully collateralized by cash value. Interest accrues, collateral is required, and the arrangement carries real risk.

Who Are the Typical Clients of Premium Finance?

The typical clients of premium finance are established business owners and high-earning professionals whose net worth is tied up in a company, real estate, or a practice rather than sitting in cash. For an owner with 25 or more employees and a business worth well over $5M, writing a seven-figure premium check personally can compete directly with payroll and reinvestment.

Premium finance for companies tends to make sense when three things line up: a genuine need for large permanent life insurance, income and balance-sheet strength to support a loan, and a preference for funding premiums through a loan rather than a lump-sum outlay from the business. It is decidedly not for everyone. The required disclosure that premium finance is “not suitable for all clients” is not boilerplate. It reflects the reality that the structure depends on an owner’s financial profile, tolerance for interest-rate and lender risk, and the policy’s performance over time.

At Crossfield, the owners we work with most often are entrepreneurs and professionals who understand debt as a tool and want life insurance.

What Are the Benefits of Premium Financing?

The benefit of premium financing is that it allows a business owner to put substantial life insurance in force by paying the loan interest rather than the full premium out of pocket. For owners who are concentrated in an illiquid business, that difference is the central appeal.

Three business problems premium finance life insurance commonly connects to:

• Key-person exposure. The New York Department of Financial Services confirms a business may use life insurance to protect against the premature death of a key person and to support business continuation. Premium finance can fund that coverage without a large upfront cash outlay.
• Buy-sell funding gaps. With 68% of owners lacking a buy-sell agreement, per the Family Firm Institute, premium finance can serve as the funding mechanism for an agreement once it is in place.
• Estate tax funding and equalization. With the 2026 federal estate tax exclusion at $15,000,000, families with an illiquid business often need cash to settle obligations or to equalize inheritances among heirs who are and are not active in the business. A life insurance death benefit is often the instrument that provides that cash. 

These benefits are real, but they exist alongside real risk. Interest is owed, collateral is pledged, and policy values are not guaranteed. Both sides need to stay in view.

How Is Premium Finance Different From Other Borrowing Strategies?

Premium finance differs from other borrowing in that the loan proceeds are used specifically to pay life insurance premiums, and the loan is secured by an interest in the policy, rather than being general-purpose debt. California’s statutory definition makes the purpose explicit: a loan made primarily to pay premiums, secured by the policy.

It also differs from adjacent structures, such as split-dollar arrangements. Split-dollar life insurance is governed by Treasury regulations under 26 CFR §1.61-22, which set rules across income, gift, and employment taxes, and it is frequently used in executive-benefit contexts. Premium finance, by contrast, brings a third-party lender into the picture. The table below lays out how the two compare on the points owners ask about most.

Comparison: Funding Business-Related Life Insurance Premiums

Feature	Premium finance (borrow to fund premiums)	Split-dollar arrangement
Core mechanism	Third-party lender loan pays premiums; loan secured by an interest in the policy (U.S. Bank; CA Insurance Code)	Shared arrangement governed by Treasury rules (26 CFR §1.61-22)
Interest-rate exposure	Often variable, based on Prime or SOFR (U.S. Bank)	Depends on arrangement terms and regulations
Collateral	Policy plus additional collateral options such as brokerage accounts, letters of credit, other policies/annuities, and bank CDs (Enterprise Bank & Trust)	Governed by the specific arrangement
Tax treatment	Fact-specific; interest deductibility limited by IRC §264	Income/gift/employment tax rules under 26 CFR §1.61-22
Ownership-change caution	State disclosures may apply, e.g., CA Insurance Code §10113.2	Depends on structure

Tax treatment depends on individual circumstances. Consult your tax advisor. References to specific institutions reflect publicly available materials as of August 28th, 2026 and do not imply a business relationship, referral arrangement, or endorsement.

Is the Loan Rate Tied to SOFR or Prime, and Why Does That Matter?

Premium finance loan rates are often variable and based on either Prime or SOFR, according to U.S. Bank. That single design choice is why interest-rate risk sits at the center of any honest premium finance conversation.

SOFR, the Secured Overnight Financing Rate, is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, and the New York Fed publishes it each business day around 8:00 a.m. ET. Because it is built from live Treasury repo transactions, it moves with markets. Recent FRED figures put SOFR at 3.62% on 2026-07-22, with the Effective Federal Funds Rate at 3.63% the same day and Prime at 6.75% effective 2025-12-11.

The practical takeaway: when the underlying index rises, the interest owed on a variable-premium finance loan can also rise. That is interest-rate risk in plain terms, and it should never be buried or offset. Alongside it sit lender risk, meaning a lender’s terms, renewals, and collateral requirements can change, and policy-performance risk, meaning the policy’s non-guaranteed values may come in different than projected.

How Does Premium Finance Work With Indexed Universal Life Insurance?

Premium finance works with permanent life insurance, including indexed universal life, by using borrowed funds to pay the policy premiums. In contrast, the policy builds cash value that can serve as collateral. Permanent policies with cash value are commonly used because that value is central to how the lender secures the loan.

A few features matter when a permanent policy is used in a financed structure. First, cash value serves as collateral, but U.S. Bank’s caution holds: financing is not free, even when that value fully collateralizes a loan. Second, policy performance is not guaranteed; projected values are assumptions, not promises. Third, if distributions or loans are taken from the policy, the 7-pay test and Modified Endowment Contract rules under 26 USC §7702A can affect tax treatment. That is a point to work through with tax counsel before design, not after.

Values shown are non-guaranteed projections based on current assumptions. Actual results will vary. Past performance is not indicative of future results.

How Does Premium Finance Work for Estate Planning?

Premium finance works for estate planning by funding the premiums on a life insurance policy whose death benefit can help settle an estate, often so heirs do not have to sell an illiquid business to meet obligations. With the 2026 estate tax basic exclusion amount at $15,000,000 per IRS IR-2025-103, families that are concentrated in a company frequently consider insurance to generate cash outside the business.

Premium finance also plays a role in estate equalization. When one child runs the company, and others do not, an insurance death benefit can provide non-active heirs with comparable value without forcing a sale or fracturing ownership. Policy ownership in these structures is often held by a trust rather than an individual, a design decision that a client’s legal team should drive. Note the state-law caution too: California Insurance Code §10113.2 warns that a future change of ownership could limit the ability to buy additional coverage on the insured’s life, since insurers cap how much they will issue on any one life.

Tax treatment depends on individual circumstances. Consult your tax advisor.

What Employer-Owned Life Insurance Rules Apply When the Business Owns the Policy?

This applies regardless of company size — EOLI notice, consent, and Form 8925 reporting requirements are triggered by employer ownership of the policy, not employee count. It’s a critical area for the 25+-employee businesses this article is written for, and for smaller ones, too.

The U.S. Code text of 26 USC §101 defines an “employer-owned life insurance contract” and specifies notice/consent requirements for the employee before issuance. IRS Notice 2009-48 walks through EOLI treatment and exceptions under IRC §§101(j) and 6039I, including Form 8925 reporting. Under 26 CFR §1.6039I-1, applicable policyholders owning EOLI contracts issued after August 17, 2006 must report items such as the number of employees, the number insured, total insurance in force, and whether valid consent exists, by attaching Form 8925 to the income tax return. The Form 8925 PDF contains the exact fields.

On deductibility, care is needed. Under 26 CFR §1.264-1, premiums on life insurance covering an officer or employee are not deductible when the taxpayer is directly or indirectly a beneficiary, a point echoed in IRS Publication 334. And IRC §264 also limits deductions for interest on indebtedness incurred to purchase or carry certain insurance contracts. Whether any of this applies to a given structure is fact-specific and belongs with tax counsel.

Tax treatment depends on individual circumstances. Consult your tax advisor.

A Step-by-Step Checklist for Business Owners Considering Premium Finance

Use this sequence as a working checklist. Each step maps to a real source or a decision point an owner will face.

1. Confirm the business purpose for the coverage. Key-person protection and business continuation are recognized uses per the NY DFS Consumer Life Insurance FAQ.
2. Decide whether premiums will be paid directly or funded through borrowing. Premium financing is one funding path, described by U.S. Bank.
3. Select the life insurance policy and confirm how financing interacts with ownership and collateral. State-law definitions may apply per the California Insurance Code.
4. Choose the lender terms, including the interest rate index. Confirm whether the rate is tied to Prime or SOFR, per U.S. Bank, and model what happens if that index rises.
5. Document the collateral approach. Understand the collateral types a lender may accept, such as brokerage accounts, letters of credit, additional policies or annuities, and bank CDs, per Enterprise Bank & Trust.
6. Plan for collateral that could be required later. Because lenders can request additional collateral if values change, build that possibility into planning rather than treating today’s requirement as fixed.
7. If policies are employer-owned on employees, employer-owned life insurance notice, consent, and reporting rules may apply (IRS Notice 2009-48, 26 CFR §1.6039I-1, and file Form 8925.). This is not legal advice — confirm requirements with an attorney or CPA. 
8. Have tax counsel review deductibility questions. Both premium and interest deductibility are limited under IRC §264; do not assume either applies.
9. Track the three risks continuously. Monitor index-rate movements, lender requirements, and policy performance using the NY Fed’s SOFR methodology to understand why borrowing costs change.
10. Confirm alignment with succession and estate documents. Make sure policy ownership and beneficiary structure match the buy-sell and estate plan before anything is issued.

Premium finance involves borrowing from a third-party lender. Interest-rate risk, lender risk, and policy-performance risk are all present. Not suitable for all clients. Consult your legal, tax, and financial advisors.

Why the Timing Conversation Is Happening Now

Demand for life insurance is at record levels, which is part of why more owners are asking how to fund large policies. LIMRA reported that 2025 industry-wide new annualized premium topped $17.5 billion, up 10% year over year and a sales record, following a prior record of $15.9 billion in 2024. More owners are placing coverage, and premium finance for companies is one of the funding conversations that follows.

How Crossfield Approaches This Work

Crossfield Strategic Partners is a licensed insurance agency. Tomer Dicturel is a Licensed Insurance Producer, specializing in premium-financed life insurance, and works with qualified clients to coordinate carrier underwriting and lender requirements at every stage of the process.

This article is for general education only and is not a solicitation of insurance business in any state where Tomer or Crossfield is not licensed.

Frequently Asked Questions

Who are the typical clients of premium finance?

The typical clients of premium finance are established business owners and high-earning professionals whose net worth is concentrated in a company or practice rather than sitting in cash. Premium finance tends to suit owners with a real need for large, permanent life insurance, as well as the income and balance sheet to support a loan. It is not suitable for all clients, so suitability is assessed individually.

What are the benefits of premium financing?

The core benefit is putting substantial life insurance in force while paying loan interest rather than the full premium out of pocket. It is used to fund key-person coverage, buy-sell agreements, and estate liquidity. Those benefits come with interest-rate risk, lender risk, and policy-performance risk, all of which stay in view.

How is premium finance different from other borrowing strategies?

Premium finance is a loan made specifically to pay life insurance premiums and secured by an interest in the policy, per California’s statutory definition, rather than general-purpose debt. It also differs from split-dollar arrangements, which are governed by 26 CFR §1.61-22, because premium finance brings in a third-party lender and often carries variable, index-based interest.

How does premium finance work with indexed universal life insurance?

It uses borrowed funds to pay premiums on a permanent policy, such as an indexed universal life policy, with the policy’s cash value serving as collateral. Policy performance is not guaranteed, and financing is not free even when fully collateralized by cash value, per U.S. Bank. Distributions or loans can trigger the Modified Endowment Contract rules under 26 U.S.C. § 7702A.

How does premium finance work for estate planning?

It funds premiums on a policy whose death benefit helps settle an estate, helping heirs avoid selling an illiquid business to cover obligations. With the 2026 estate tax exclusion at $15,000,000, owners often use the death benefit for estate settlement and to equalize inheritances among active and non-active heirs. Policy ownership is frequently held by a trust, a design decision a client’s legal team should lead.

Bank-funded and collateral products are not deposits. Not FDIC insured. May lose value. Not bank guaranteed and not insured by any federal government agency. 

Life insurance products are not securities or investment products. This is not investment advice. Premium finance involves borrowing from a third-party lender. Interest-rate risk, lender risk, and policy-performance risk are all present. Not suitable for all clients. Consult your legal, tax, and financial advisors. Values shown are non-guaranteed projections based on current assumptions. Actual results will vary. Past performance is not indicative of future results. This is not legal advice — an attorney can confirm which notice, consent, and reporting obligations apply to your specific ownership structure. Tax treatment depends on individual circumstances. Consult your tax advisor.

Works Cited

California Legislative Information. “California Insurance Code, Premium Finance Definitions.” leginfo.legislature.ca.gov, leginfo.legislature.ca.gov/faces/codes_displayText.xhtml?article=1.&chapter=1.&division=2.&lawCode=INS&part=2.&title=.

California Legislative Information. “California Insurance Code §10113.2.” leginfo.legislature.ca.gov, leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=INS&sectionNum=10113.2.

Cornell Law School Legal Information Institute. “26 CFR §1.61-22 — Taxation of Split-Dollar Life Insurance Arrangements.” law.cornell.edu, law.cornell.edu/cfr/text/26/1.61-22.

Cornell Law School Legal Information Institute. “26 CFR §1.264-1 — Premiums on Life Insurance Taken Out in a Trade or Business.” law.cornell.edu, law.cornell.edu/cfr/text/26/1.264-1.

Cornell Law School Legal Information Institute. “26 CFR §1.6039I-1 — Reporting of Employer-Owned Life Insurance Contracts.” law.cornell.edu, law.cornell.edu/cfr/text/26/1.6039I-1.

Cornell Law School Legal Information Institute. “26 U.S. Code §101 — Certain Death Benefits.” law.cornell.edu, law.cornell.edu/uscode/text/26/101.

Cornell Law School Legal Information Institute. “26 U.S. Code §264 — Certain Amounts Paid in Connection With Insurance Contracts.” law.cornell.edu, law.cornell.edu/uscode/text/26/264.

Cornell Law School Legal Information Institute. “26 U.S. Code §7702A — Modified Endowment Contract Defined.” law.cornell.edu, law.cornell.edu/uscode/text/26/7702A.

Enterprise Bank & Trust. “Life Insurance Premium Finance.” enterprisebank.com, enterprisebank.com/business/life-insurance-premium-finance.

Federal Reserve Bank of New York. “Additional Information about Reference Rates Administered by the New York Fed.” newyorkfed.org, newyorkfed.org/markets/reference-rates/additional-information-about-reference-rates.

Federal Reserve Bank of New York. “Secured Overnight Financing Rate Data.” newyorkfed.org, newyorkfed.org/markets/reference-rates/sofr.

Federal Reserve Bank of St. Louis. “Bank Prime Loan Rate (DPRIME).” FRED, fred.stlouisfed.org/series/DPRIME.

Federal Reserve Bank of St. Louis. “Effective Federal Funds Rate (EFFR).” FRED, fred.stlouisfed.org/series/EFFR.

Federal Reserve Bank of St. Louis. “Secured Overnight Financing Rate (SOFR).” FRED, fred.stlouisfed.org/series/SOFR.

Frosh, Dan. “Research Applied: An FBR Précis on the Ownership Contract and the Market for Legal Advice for Family Businesses.” FFI Practitioner, Family Firm Institute, 21 Jan. 2025, ffipractitioner.org/research-applied-an-fbr-precis-on-the-ownership-contract-and-the-market-for-legal-advice-for-family-businesses/.

Internal Revenue Service. “About Form 8925, Report of Employer-Owned Life Insurance Contracts.” irs.gov, irs.gov/forms-pubs/about-form-8925.

Internal Revenue Service. “IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments from the One, Big, Beautiful Bill.” IR-2025-103, 9 Oct. 2025, irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill.

Internal Revenue Service. “Notice 2009-48: Employer-Owned Life Insurance Contracts.” irs.gov, irs.gov/pub/irs-drop/n-09-48.pdf.

Internal Revenue Service. “Publication 334: Tax Guide for Small Business.” irs.gov, irs.gov/publications/p334.

Internal Revenue Service. “What’s New — Estate and Gift Tax.” irs.gov, irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax.

LIMRA. “U.S. Individual Life Insurance New Premium Tops $17.5 Billion to Set New Sales Record in 2025.” limra.com, 19 Mar. 2026, limra.com/en/newsroom/news-releases/2026/limra-u.s.-individual-life-insurance-new-premium-tops-$17.5-billion-to-set-new-sales-record-in-2025/.

LIMRA. “U.S. Individual Life Insurance Premium Sets New Sales Record in 2024.” limra.com, 25 Mar. 2025, limra.com/en/newsroom/news-releases/2025/limra-u.s.-individual-life-insurance-premium-sets-new-sales-record-in-2024/.

New York State Department of Financial Services. “Consumer Life Insurance FAQ.” dfs.ny.gov, dfs.ny.gov/faqs/consumer_faqs/life_insurance.

U.S. Bank. “Insurance Premium Financing: Life Insurance.” usbank.com, usbank.com/wealth-management/financial-perspectives/financial-planning/insurance-premium-financing.html.