Premium financing collateral is the collection of assets pledged to secure a premium finance loan used to pay life insurance premiums. The collateral typically includes the life insurance policy itself-assigned to the lender-as well as additional assets such as marketable securities, cash, or letters of credit to cover any shortfall between loan balance and policy value. Lenders track collateral ratios and may require additional pledges if policy performance lags or loan balances grow faster than expected. Collateral management is central to premium financing risk, as borrowers must be willing and able to post additional assets or repay the loan if conditions change.

In real-world premium finance cases, advisors work with lenders to structure collateral arrangements that fit the client's risk tolerance and liquidity. Legal documents outline how collateral is valued, how often it is re-evaluated, and what happens if coverage is surrendered, refinanced, or unwound. Annual reviews compare loan balances, policy cash values, and collateral positions, and may prompt adjustments or partial paydowns. Clients need clear explanations of collateral calls, margin risk, and the possibility that additional assets could be required during market downturns. Thorough documentation of collateral agreements and ongoing communication with the client's advisory team are essential for responsible premium financing practices.