Why premium-financed IUL is failing

In his recent article, "Setting the Record Straight on Premium-Financed IUL," Michael J. Rothman of Succession Capital Alliance argues that premium financing remains a sophisticated estate-planning tool and that its failures reflect only poor execution and disclosure. That defense ignores a deeper problem: The structure itself is unstable. Advocates for the concept argue that "good transactions" mean:

• The client has funds to pay the premium out of pocket but chooses to finance.
• There is no roll-up of interest on the loan; interest is paid out of pocket.
• The death benefit and premium are reasonable relative to income and net worth.
• The structure includes full disclosure, meaningful downside stress-testing, and a realistic exit strategy beyond hoping the policy repays the loan.
• The policy design is prudent, not maximized for leverage, commissions, or aggressively illustrated returns.

I appreciate Michael's willingness to defend his platform, but his argument overlooks a hard structural and mathematical reality. The widespread failure of these plans is not an execution problem caused by a few bad actors — it is the natural and foreseeable result of an unstable financial design.

My criticism is not of innovative insurance products when they are suitable, well-designed, and sold responsibly. Valmark is proud of its $70 billion in in-force life insurance, and I view life insurance as an important part of my own planning. My criticism is directed at a sales concept that takes an already complex, opaque, and risk-sensitive product and sells it in the most aggressive, highly leveraged way possible. The suggested guardrails above have, in practice, been ignored by both agents and insurers.

Our view at Valmark is informed not only by our review of more than 100 of these plans, including some in litigation. It is also informed by our conclusion, reached 10 years ago when this aggressive sales technique emerged, that premium-financed indexed universal life is not in the client's best interest. We therefore prohibited the practice by anyone registered at Valmark. The downside was just too great.

A close look at macroeconomic pressures, higher bank loan rates, falling caps and mounting litigation leads to one conclusion: Premium-financed IUL is failing because the math no longer works. And if full disclosure and rigorous suitability were actually applied, the pool of appropriate clients would be vanishingly small.

1. The death of arbitrage: Real math vs. AG-49 illusions

Premium finance depends on positive arbitrage: Net policy performance must exceed borrowing costs after product charges, loan costs, and commissions. That premise is increasingly unrealistic.

• Even after multiple reforms by the National Association of Insurance Commissioners, AG-49 remains an unrealistic baseline as it still permits assumptions that overstate likely outcomes. It is still based on carriers earning 45% on options to credit these policies at the illustrated rate.
• Indexing drag: IUL credits exclude dividends, which historically contributed materially to total equity return.
• Lower caps: carriers have reduced caps from the mid-teens to roughly 7%–8%, impairing future performance.
• Reality: Rothman compares his proposals to a variable universal life policy illustrated at 8%. That flawed comparison is a huge part of the problem. An 8% S&P 500 return can translate to only about 3.82% to 4.30% inside a capped, dividend-free IUL.

Meanwhile, borrowing costs have often risen above 7%. A product earning 4% cannot outpace a loan costing 7%. That turns illustrated arbitrage into negative leverage and has opened massive gaps in collateral.

2. A special warning for illiquid business owners and real estate clients

The financing pitch often targets business owners and real estate investors with 80% to 90% of net worth tied up in illiquid assets. The argument goes like this: You can earn more money in your business than you can on the policy, so you should borrow to buy your life insurance.

The first part of that premise is true, but the conclusion is flawed. Premium financing compounds the liquidity problem by adding interest-rate, performance and collateral risk. When these programs fail, the collateralized liquid assets outside the business must be tapped or sold at the worst possible time. This is not a risk-management strategy — it is a risk-multiplication trap.

3. The danger of "zero-return" proprietary indexes

To keep financing going and escape falling S&P 500 caps, promoters have shifted to opaque proprietary indexes marketed with attractive backtests and promises of uncapped returns.

Instead, many have performed worse. During the bull markets of 2023 and 2024, the S&P 500 rose a combined 56%, while many proprietary indexes credited only 1% to 3% and some credited 0%, depending on the index and crediting method.

Under leverage, a single 0% year can turn weak performance into a severe setback, because loan interest keeps compounding even when policy credits do not.

4. Compounding "debt hole" and the fallacy of patience

When these programs begin to fail, clients are often told to "be patient" and wait for bank rates to fall or performance to improve.

But patience under leverage usually means going deeper into a hole. As cash value lags the compounding loan, the bank demands more collateral.

In jumbo financed cases, clients sign personal notes, borrow millions and pledge liquid assets. In some of Valmark's second-opinion reviews, required collateral often rises to four to five times the amount originally illustrated.

When liquid assets run out, the bank can call the loan, and the policy can collapse. The downside is not insurance that costs a little bit more — it is financial catastrophe.

5. The agent's trap

Agents attracted by large upfront commissions may themselves be walking into a trap. When these structures fail, the damage can flow back to the agents and marketing organizations that sold them through:

• Chargeback risk: Lapsed or rescinded financed policies can trigger commission clawbacks of hundreds of thousands of dollars — or more.
• The errors and omissions gap: Many E&O policies now exclude premium-financing claims.

This matters because the economic incentives that made these cases attractive at sale may reverse sharply when policies lapse, loans are called or clients pursue recovery.

6. Systemic litigation shows the concept doesn't work

Rothman minimizes the industry's current wave of legal challenges as a "small subset of cases." The record suggests otherwise. I can identify at least three dozen premium-financed IUL cases in active litigation, several involving multiple policyholders, with many others reportedly settled before filing. The total number is unknowable, and many of these cases are settled before filing through rescission of premium.

The growing wave of lawsuits, class actions and multimillion-dollar judgments is strong evidence that the concept is failing in practice. Courts are increasingly stepping in where state insurance regulation has failed.

Conclusion: Insurance as risk multiplier

Rothman argues that in high net worth estate planning, complexity is not the problem — context is. I disagree. The problem is math: When borrowing costs approach or exceed realistic net policy performance, leverage turns from an estate-planning enhancement into a collateral and liquidity problem.

Not every IUL product is flawed. Used appropriately, with full disclosure and restrained assumptions, IUL can serve a legitimate planning purpose. But premium-financed IUL is different: It layers leverage, collateral risk and optimistic assumptions onto an already complex product.

Traditional life insurance is designed to transfer risk. Premium-financed IUL often does the opposite: It concentrates product risk, credit risk, interest-rate risk, collateral risk and liquidity risk into a single structure.

The concept may survive a little longer in marketing materials. But under realistic math, rising chargebacks and growing litigation, it is not quite dead yet — but close.

That warning is most urgent for business owners and real estate clients with wealth tied up in illiquid assets. What is sold as a way to preserve capital can, at the worst possible time, trigger collateral calls, distressed borrowing or forced sales.

Anyone currently in one of these structures should obtain an independent review now — before loan balances rise further, zero-crediting years compound the shortfall, collateral demands increase or surrender charges make exit options more expensive.

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Larry J. Rybka, JD, CFP, is the CEO of the Valmark Financial Group. Contact him at [email protected].