Premium Finance vs Infinite Banking with Life Insurance
Updated September 2026 · by John “Hutch” Hutchinson, ChFC®, CLU®, AEP®
Premium financing is really the photo negative of infinite banking when it comes to borrowing with life insurance. With premium finance, you borrow from a bank to fund a policy so you can use your money for other things. Conversely, with infinite banking, you fund your policy with your own money and subsequently borrow against the policy when you want to use it for other things.
This video walks through how each one works, then gets into why you would use infinite banking over premium finance. One of them is about maximum leverage. The other is about maximum control and versatility.
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Funding a policy with your own money
Funding a policy with the bank’s money
The collateral requirement
Who premium finance is for
You could fairly argue that infinite banking and premium finance are photo negatives of each other. Both use life insurance and both use borrowed money. The difference is whose money funds the policy, and whose money is freed up as a result.
Funding a Policy With Your Own Money
With infinite banking, you pay the premiums out of your own pocket to build up policy equity. Then when you want to do something with that money — buy a vehicle, invest in real estate, fund your business — you borrow against the policy for those other things.
In the long run you want to pay those loans down at least to some extent, so your policy equity keeps climbing. Maybe that’s so you can keep borrowing, because you want to keep fattening up the golden goose that’s going to keep laying the golden eggs. Or maybe you want a nice big fat bucket of tax-exempt retirement income you never have to pay back — taken through withdrawals, or through loans that get paid off by the death benefit.
The mechanic underneath it is the part worth understanding. Your equity keeps compounding whether you borrow against it or not, immune from taxes and immune from market losses. It behaves as though the money never left the policy — because the money never left the policy. The insurance company is letting you borrow against the asset and is still crediting your cash value as if it were untouched. That holds whether you use a policy loan or an outside loan with better lending features, like a better rate or the convenience of a checkbook or ACH.
If that part is new to you, our flagship Banking Basics material compares using life insurance as your own bank against paying cash for everything, including a mathematical example of how decisively borrowing against life insurance beats paying cash.
Funding a Policy With the Bank’s Money
Premium finance is the opposite. You borrow from a bank to pay those premiums, which leaves your own money free to use for other things. What you can’t do is keep borrowing against a premium-financed policy. The bank already has a lien on it, and there is usually maximum leverage against it already.
So everything you’d otherwise have borrowed for gets funded out of pocket, while the life insurance strategy runs alongside on the bank’s money. Over time you’re hoping the growth of the policy equity outruns that bank loan, and then you use the equity — through a withdrawal, or a loan against the policy itself — to pay off the bank and take control of the policy. From there it’s yours for tax-exempt retirement income, or very often for estate planning.
The loan is usually drawn incrementally over the first four to seven years, so your leverage climbs as the policy gets funded. Meanwhile the first years of a policy are its worst years, and equity typically grows by less than what’s going in. It usually catches up somewhere around year five, though it’s reasonable to be conservative and assume performance takes a little extra time. Until it catches up, there’s a shortfall between what you owe the bank and what the policy is actually worth.
Posting Collateral Against the Shortfall
When there’s a shortfall with premium finance, the lender expects you to keep collateral on hand. You have to post outside cash, stocks, municipal bonds or something similar to cover the gap between the policy equity and what you’ve borrowed. If you don’t, you’re upside down and the bank can call the entire loan.
The haircuts matter here. If you want to use stocks, you usually have to post roughly double, because they only give you about 50% loan-to-value. Muni bonds run somewhere in the 60% to 70% range, usually around 65%. Cash will usually get you close to 100 cents on the dollar — ninety-something cents on the dollar.
The upside is real, though. You’re out of pocket a lot less money, and collateral held in stocks or bonds is at least still working for you elsewhere. Just by posting it, you can borrow premiums big enough that your only real out-of-pocket cost is the interest needed to keep the policy afloat.
Paying the Interest vs. Rolling It Up
Some people roll the interest up into the loan instead of paying it, which makes the debt balance climb while they hope the policy’s growth outruns it. We recommend paying the interest every year. Do that and you’re paying simple interest on a flat balance while earning compound interest on an increasing balance.
You can also pay the loan itself down if you want, which lifts both the debt and the equity. More often what we see is people just paying the interest, and then at a certain point — once there’s enough equity for the policy to handle its own loan — the policy pays off the bank.
If you’re getting favorable enough rates and terms from the bank, maybe you keep the bank loan. But usually there’s an illustrated exit strategy: withdraw from the policy or borrow against it, retire the bank loan, and let the policy equity grow from there.
Who Premium Finance Is Actually For
Before getting into the why, I have to say that premium finance is traditionally reserved not just for high-net-worth individuals but for ultra-high-net-worth ones. The threshold used to sit around $10 million of net worth, and it’s since been lowered to about $5 million. Sometimes you can get around that with very high income, around a half million dollars a year, and there are certain pooled programs that pool a lot of lower-net-worth individuals together to qualify. For the most part, though, it’s a high-net-worth product.
The reason those buyers want it is maximum leverage at all times. They’re all in on their business and their real estate, every penny is spoken for, and they want to be using OPM — other people’s money — wherever they can. Their assets are all performing elsewhere, so they don’t have a lot of cash sitting around to put into something like life insurance that grows safely. They have very big projects and a very high hurdle rate.
So whether they’re after passive retirement income or real estate leverage, the appeal is the collateral arrangement. They post assets that are already working for them — usually stocks or muni bonds, very rarely cash, and sometimes a letter of credit from their bank against real estate equity they already hold — and pay a fairly nominal amount in interest, sometimes in the 2% to 3% range and occasionally in the high 1s. What that buys them is extra leverage, whether for tax-exempt retirement or for estate planning, where the benefits are substantial.
Our full article on premium finance walks through those benefits in detail, and the risks along with them.
Why Most People Prefer Infinite Banking
Infinite banking is for people who want to turbocharge a surplus of liquid assets. It’s great for people who have a lot of cash, a lot of non-performing assets, or muni bonds they’d like to diversify away from — people who want a safe, steady, controlled return that still stays liquid enough to use for something else if they want to.
Really it’s about having controlled growth in between your opportunities. Maybe you want to pause and let the real estate market cool off, or the stock market cool off. Maybe you just want to step aside for a while without losing to inflation.
And it’s for people who want maximum control, maximum access and maximum versatility. You obviously own an asset with premium finance too, but it’s leveraged with the bank. Think of it like carrying a 95 percent mortgage with 5 percent down and a minimal interest payment. Infinite banking is the other way around: you have all that equity, and while you may still leverage it to the tune of 95 percent at some point, you then pay it back down again to fatten up the golden goose so it can lay future golden eggs. That’s usually why people prefer infinite banking.
If you want to learn more about Infinite Banking or Banking Basics, start there. And you can always schedule an appointment with us so we can model this out for you and figure out what the best path is.
I hope you found this information helpful,
At Banking Truths we believe in providing education & modeling so you can decide if this strategy is a good fit for you:
- Get all your questions answered
- See the top policies modeled out
- Never any pressure or hard pitches
John “Hutch” Hutchinson has no affiliation or association with The Infinite Banking Concept®, The Infinite Banking Institute, or Nelson Nash, nor his book Becoming Your Own Banker – Unlocking the Infinite Banking Concept; nor with Bank on Yourself, Pamela Yellen, or her book The Bank on Yourself Revolution. “The Infinite Banking Concept®” is a registered trademark of Infinite Banking Concepts Inc. “Bank On Yourself®” is a registered trademark of Hayward-Yellen 100 Limited Partnership.