When considering using premium financing to help fund indexed universal life insurance (IUL), your brokerage account may provide an interesting alternative to borrowing from a bank.

While all leverage involves risk, the stocks you own may be an untapped source of liquidity for  funding your indexed universal life insurance (IUL). Some margin accounts offer margin interest rates that may be much lower than similar loans from banks. While interest rates are in flux at today's date of May 1, 2022, loans from $100,000 up to $2,000,000 incur bank loan rates from 3.50% to 4.50%. One popular brokerage firm will make the same loan at 1.50% to 1.90%. Mind you, there is a wide range of interest charged by both banks, credit unions, and brokerages. For example, the current margin interest rate at other successful brokers ranges from 4.50% to as high as 9.00%.

With banks or credit unions, the loan is secured by the cash value of the policy. The term of the loan may be anywhere from 1 to 15 years, with fixed or adjustable rates. Banking regulations usually require loan interest to be paid in cash on a current basis. On the other hand, many margin accounts at US brokers allow for interest to accrue, so long as the underlying securities - depending on the specific type and issue, meet minimum collateral requirements. Margin loans are usually not subject to repayment at any particular time so long as "Regulation T" maintenance requirements are sufficient. Note that mutual funds are not marginable as collateral, while commonly traded stocks, ETFs, and bonds are. Different rules apply based on the specific security.

Here is a simple example for being able to obtain funds from a margin account. A person owns a diverse portfolio of listed stocks with a current market value of $100,000 with one broker. The account is either a cash account or is not currently leveraged with margin debt. The person learns that his or her broker is one of the many that charge 5% or more for a margin loan. In order to get these stocks moved to the brokerage offering 1.90%, he or she opens a new margin account with proper permissions and initiates a transfer using the Automated Customer Account Transfer Service (ACATS). Once moved, he or she may withdraw from the new account up to another $100,000. That withdrawal is in the form of a margin loan at 1.90%. But what if the market price of the portfolio falls? The $200,000 can decline up to 25% to $150,000 before he or she would face a margin call or partial liquidation.

The wisdom of borrowing on margin - even though the loan rate is lower than for a bank loan - depends on the volatility of the stocks and the degree to which he or she leverages the portfolio. For example, a person owns a portfolio containing only relatively stable "dividend aristocrats" with a current market value of $2,000,000. He or she wants to take out a total of $500,000 over 3 years to fund an IUL policy. (After the third year, it is assumed that the policy duplifunds itself moving  forward.) It would be necessary for the market value of the stocks to fall more than a whopping 75% to under $500,000 for there to be a margin call. This is theoretically possible, but a portfolio of "blue chip" stocks is extremely unlikely to do so under any historical market conditions.

It is true that the collateral for bank financing is the IUL policy's cash value. The investment component of IUL will never lose value, and the overall policy value may only be reduced by ongoing expense charges. This is arguably even less volatile collateral than securing the loan with dividend aristocrats. It all comes down to risk tolerance and the degree of leverage you apply to the value of the stocks.