Benefits Of Insurance Premium Financing

What Is Insurance Premium Financing?

Insurance Premium Financing is not a novel idea; in fact, it has been accessible for many years. In the past, non-recourse loans were utilized to finance insurance premiums, and the policyholder was only required to provide the policy itself as collateral.

Unfortunately, non-recourse premium financing is no longer allowed as a financing option due to fraud and other issues. Modern insurance premium financing is a useful and efficient solution to assist companies with real insurance requirements today.

An insured party may spread out their insurance premium payment throughout a policy by using this sort of financing, rather than paying the entire cost upfront if it is correctly arranged. The insured then pays the lender by the terms that were agreed upon, which often include a down payment followed by several installment payments.

How Does Financing for Insurance Premiums Work?

A business will typically borrow money to pay for an insurance policy, such as life insurance or a retirement plan, through insurance premium financing. The cash surrender value of the purchased insurance policy serves as collateral for the loan. Numerous private banks and financial organizations are among the numerous third-party lenders who provide funding for insurance premiums.

Many different sorts of buyers, including high-net-worth people, entrepreneurs, and business owners, use premium financing as an effective method. Business owners won't have to liquidate or sell their assets to pay for the entire upfront cost of the insurance policy if the bulk of the upfront cost is financed.

Benefits Of Financing Insurance Premiums

A Cheaper Funding Method

Simply put, Insurance premium financing refers to obtaining credit from a bank or other lender to pay life insurance premiums. The current low-interest rates on these loans enable policyholders to finance premium payments for a reasonable price. A long-term loan with a variable interest rate based on the London Interbank Offered Rate (LIBOR) or another index is typically the basis of a premium financing agreement. The insured is required to provide collateral for the loan, often the cash surrender value of the policy, with any deficit being made up for by other collateral, like a letter of credit or marketable securities.

Increasing Returns

The main advantage of premium financing is that it makes it possible to get the necessary life insurance at a low current out-of-pocket expense. This might enable the policyholder to put the cash that would have gone toward premium payments toward investments that have higher potential returns.

Received full commissions

Premium financing gives insurance companies the chance to provide their insureds with a higher degree of customer care while still generating revenue. Although premium financing enables the insured to spread their payments across eight, nine, or even more months, the agency still receives its full commission at the time the loan is funded, not once the insured has made all of their payments. Premium financing can result in the realization of the full commission six to nine months sooner than carrier direct billing because the majority of carriers' direct bill programs pay a percentage of the commission with each monthly or quarterly payment received from the insured.

Additional advantages for insurers and brokers

Not simply the client gains from this. The third-party partnership with a premium finance provider benefits brokers, insurers, and Managing General Agents (MGAs) as well. In addition to expanding available payment methods and giving customers more options, intermediaries are paid a commission on each new credit agreement they establish for clients who elect to pay this way. Instead of having to collect money from customers during the policy year or handle late payments, insurers and MGAs receive their entire premium upfront and on time. There is no loser here.

The Future

Businesses are going to face difficulties in the upcoming months. Utilizing Insurance Premium Financing wisely will be crucial to ensuring that businesses run smoothly and that brokers and insurers alike have prospects for expansion.