Lombard loan

A Lombard loan gives access to cash while the assets stay invested. Private banks offer them against portfolios of listed securities and, in life insurance planning, against an IUL policy or a PPLI structure. The bank is the lender. The insurer's role is to agree to and record the bank's security over the policy, the structure or the assets inside it.

How it works

The borrower pledges assets to the bank, or assigns a life policy to it as collateral. The bank sets a lending value for each asset, a percentage of its market value that depends on how liquid and how volatile the asset is. Interest is usually floating, a margin over a benchmark rate such as SOFR for US dollar loans. If the collateral falls below the level the facility requires, the bank can ask for more collateral or part repayment, and can sell pledged assets if neither arrives.

Lombard loan and policy loan compared

• Lender. Lombard loan: a bank. Policy loan: the insurer that issued the policy.
• Security. Lombard loan: assets pledged to the bank, which can include the policy. Policy loan: the policy's own cash value.
• Interest. Lombard loan: set by the bank, usually floating. Policy loan: set by the insurer under the policy terms, as a fixed loan or a participating loan.
• When values fall. Lombard loan: the bank can call for more collateral. Policy loan: the loan and interest must stay within the cash surrender value, or the policy can lapse.
• Repayment. Lombard loan: on the facility's terms. Policy loan: flexible, and any balance left at death is deducted from the death benefit.

In an international IUL

Premium financing is a Lombard-style arrangement: a bank lends to pay the IUL premiums, secured on the policy and, often, on other assets. Capital for Life can arrange premium financing, and a multi-pay premium plan funded over five to ten years is set out alongside it so the two can be compared. Policy loans, by contrast, are the usual way to draw income or liquidity from a funded IUL.

In a PPLI structure

A bank can lend against a PPLI structure, with the structure pledged as collateral and the portfolio inside it valued for lending. A Lombard loan can also be taken against an asset held inside the structure itself: with the insurer's agreement as legal owner, the bank takes security over that asset in the custody account and lends against it. Either way, the policyholder gets liquidity without selling the underlying investments.

Common questions

Is a Lombard loan the same as a policy loan?

No. A Lombard loan is a bank loan secured against assets. A policy loan is a loan from the insurer itself against the policy. They can sit side by side: a bank can hold security over a policy that also has a policy loan outstanding, subject to the bank's and insurer's terms.

Can a Lombard loan be used to pay IUL premiums?

Yes. That is premium financing. The loan interest and the risk of a collateral call need to be weighed against funding the premiums over several years from income or capital.

Go deeper: premium financing and IUL policy loans.