Zachary Kester Weighs the Case for Lending Against Death Benefit Rather Than Cash Value

For most of the past forty years, a life insurance policy landed on a lender's collateral schedule for one reason: its cash surrender value. Cash value is legible. It sits on a carrier statement, it is contractually accessible, and it is reported rather than estimated. Advance against it conservatively, and the credit behaves a lot like a secured line against a savings account. That legibility is why cash value became the default, and why the far larger number on the same policy, the death benefit, has traditionally been something a lender monitored rather than something a lender lent against.

That convention is being tested at the edges. In a narrow set of bespoke private credit situations, lenders have begun underwriting to the death benefit itself, structuring the loan so the policy's eventual payment, rather than its surrender value, retires the debt. This is a different underwriting problem, not a more aggressive version of the same one, and it tends to surface in bespoke charitable gift financing, where the loan funds a gift the donor wants to make now. Zachary Kester, who manages a fund built around that kind of one-off, asset-backed lending, is direct about what the structure requires and about where it stops working.

Image Source: Unsplash

Why Cash Value Became the Default

The case for cash value collateral is a case about certainty of timing. A surrender value is a present, contractual claim against the carrier, available on request, in an amount the carrier states rather than one a lender has to model. If the credit deteriorates, nobody is waiting on a market, a buyer, or an event outside anyone's control.

What that convenience hides is the cost of actually using it. Surrendering a policy is a taxable event. Gain above the owner's basis in the contract is taxed as ordinary income, and the coverage ends the moment the check is cut. For an owner who bought the policy to do something specific for a family or a charity, surrender is not a neutral liquidity option. It permanently destroys the asset and triggers a tax bill. That's why borrowing against a policy exists as a category at all. The only question is which number on the statement the loan is sized against.

Death benefit collateral gives up the timing certainty completely. The face amount is larger, sometimes by an order of magnitude, but it converts to cash only when the insured dies. A lender underwriting to it accepts an asset with a known amount and an unknown date. For a lender funding short-duration paper, that is a non-starter, and the mismatch between that collateral and those liabilities disqualifies the structure before anyone opens the policy.

That is why Zachary Kester frames the choice as a question about the lender rather than the policy. The question is not whether death benefit collateral is riskier in the abstract. It is whether a particular lender's liability structure, hold horizon, and mandate can absorb the specific risk that cash value lending was built to eliminate.

What Actually Changes in the Collateral File

When the death benefit is the collateral rather than the backstop, the underwriting file changes character. As Zachary Kester describes the work, three items move from the appendix to the front page.

Mortality and life expectancy. The loan's duration becomes a range rather than a date, so it must be underwritten instead of assumed. That calls for current medical underwriting and independent life expectancy analysis, not the classification the carrier assigned when the policy was issued. An underwriting class set fifteen years ago describes the applicant the insured used to be. It says little about the collateral today, and nothing about how wide the range around the estimate should be.

Carrier credit. The obligation behind a death benefit belongs to the insurance company, and in this structure the lender holds that exposure for a long time. It is worth being precise about what the exposure is. Policy obligations are supported by statutory reserves and, in a receivership, rank ahead of an insurer's general unsecured creditors, so this is not the same thing as holding ordinary corporate paper. But state guaranty association coverage, which most people think of as the backstop, is capped far below the face amounts involved here and is designed for individual policyholders rather than institutions. Carrier selection, ratings, and reserve strength are the real protection. The guaranty system is not something a lender should be underwriting to.

Policy mechanics. A guaranteed universal life policy with a no-lapse guarantee, a current-assumption universal life policy whose cost of insurance charges can rise, a convertible term policy, and a variable policy whose account value carries market risk are four different collateral instruments at identical face amounts. What matters is what the contract guarantees, what it merely projects, and what the owner has to keep doing for the coverage to stay in force. The illustration is a sales document. The contract is the collateral.

Servicing Risk Is the Real Risk

The failure mode here is rarely a life expectancy estimate that comes in long. It is lapse. A policy that lapses is collateral that disappears, and it disappears for administrative reasons unrelated to the borrower's credit or the insured's health. A missed billing notice, a change of address, an automatic premium loan quietly eroding account value: none of these look like credit events until the coverage is gone.

That is why premium funding, rather than valuation, dominates the covenant package. Policies in these situations are usually still premium-paying, which makes the obligation continuous rather than something settled at closing. A defensible facility projects premiums across the full underwriting horizon and reserves against them, establishes direct visibility into policy status so a problem surfaces in weeks rather than at the next annual statement, preserves the ability to cure a missed payment before a grace period runs out, and treats a grace period as a hard covenant event rather than a reporting footnote. This is the operational discipline Zachary Kester points to when he argues that bespoke asset-backed lending lives or dies on what happens after closing rather than on the advance rate agreed at it.

A second, quieter servicing issue exists, and Zachary Kester treats it as a reporting obligation rather than a modeling nicety. Death benefit collateral does not mark daily, which sounds like a feature during volatility and behaves like a liability during an audit. Without a market price, the carrying value is a model, and the model needs independent inputs, documented assumptions, and stress testing against longer life expectancies. Funds that skip this step discover the problem at exactly the wrong moment, when an investor or an auditor asks how the number was derived.

Where the Structure Actually Fits

The honest answer is that this fits a narrow set of situations, and the narrowness is the point rather than a limitation to be engineered away.

It fits where the lender holds its notes for the long term and funds itself with patient capital not subject to a redemption calendar, because this collateral cannot promise a date. It fits where the lender can carry and service a continuing premium obligation for as long as the loan is outstanding, which is an operating capability rather than a credit judgment, and which is the single best reason most lenders should not attempt this. It fits where the underwriting is specialized enough to value the collateral honestly and to decline the file when the number is not supported. And it fits where the purpose of the loan genuinely cannot be served by the surrender value, either because the surrender value is not there in any meaningful amount, or because reaching it would end the coverage and trigger tax on the gain.

That last condition is what makes the structure relevant in philanthropic finance specifically, and it is the context in which Zachary Kester encounters it most often. An owner who wants to make a significant gift now may hold a policy whose value to the family has always been its face amount. Financing against that face amount can fund the gift today without surrendering coverage that was the entire point of buying the policy. The collateral is not being stretched to reach a number. It is doing the one thing it was always going to do. What makes that workable is not a tolerance for unusual collateral but the collateral discipline in private credit that governs how such collateral is valued, documented, and monitored across the life of the loan.

The Bright Lines

Nothing here works without a clean legal foundation, and it is worth being accurate about where the lines fall, because the folklore in this area is wrong in both directions.

Insurable interest has to have been genuine when the policy was issued. Policies originated so that an unrelated investor could eventually take an interest in them run into stranger-originated life insurance prohibitions, which exist in some form in nearly every state. That is a question about how a policy came into existence. It is not a question about whether a legitimately issued policy can later support a loan.

On the tax side, the rule most often misstated is the transfer-for-value rule. Pledging a policy as security for a loan is not a transfer for value, and it does not put the income tax exclusion for death benefits at risk. That rule addresses transfers of ownership for consideration, which is a different transaction entirely. Borrowing against a policy and selling one are not variations on a theme, and advisors who treat them as the same thing talk clients out of ordinary, well-established financing. What deserves real attention is the loan's tax analysis, including the treatment of interest and how the arrangement interacts with the charitable deduction when a gift is involved. Those are questions for the client's own tax counsel on the specific facts.

Contestability and suicide exclusion periods matter for recently issued policies and are a non-issue for seasoned ones. And the borrower needs to understand, in writing, how the loan is expected to be repaid, and the family and estate implications that follow.

None of these are reasons to avoid the structure. They are reasons it stays bespoke. Every loan of this type is a legal document as much as a credit decision, which is why Zachary Kester has sales, credit, and compliance evaluate a deal together early in the process rather than passing a file down a line.

A Narrow Door, Not a New Default

Death benefit lending is not a replacement for cash value lending, and the death benefit is not the new cash value. Cash value will remain the default collateral for the overwhelming majority of policy-secured credit, because certainty of timing is worth more to most lenders than size of face amount.

What has changed is that a small category of lenders, with long-dated capital, specialized underwriting, and a purpose that justifies the complexity, can work in a place that was effectively closed before. Used precisely, the structure turns an asset that was doing nothing into capital that does something, without destroying the coverage to get there. Used loosely, it produces illiquid paper with an undefined term and a collateral file nobody can defend. The difference, in the distinction Zachary Kester keeps returning to, is in the discipline rather than in the instrument. This article is general information about how these structures are underwritten and is not legal, tax, or investment advice.

About Zachary Kester

Kester is the Managing Director of Advanta Management, manager of the Advanta Charitable Lending Fund LLC, a private credit fund that issues bespoke charitable gift financing loans to individuals. The fund pools capital from charitable organizations for program-related lending, prioritizing charitable purpose over financial return while preserving enough return to recycle capital into future giving. His work spans private placements, private credit lending, and private debt fund management.

He holds a Certificate in Fundraising Management and Philanthropic Studies from the Indiana University Lilly Family School of Philanthropy and the Chartered Advisor in Philanthropy designation from The American College of Financial Services. Alongside his fund work, he serves as a director of Advanta Philanthropic. He spends a portion of his time explaining complex giving strategies to the professional advisors whose clients are most likely to encounter them.