Premium Financing

From Wikipedia, the free encyclopedia

Premium Financing involves the lending of funds to a person or company to cover the cost of an insurance premium. Premium finance loans are often provided by third party finance entity known as a "Premium Financing Company"; however insurance companies and brokerages occasionally provide premium financing services. [1]

To finance a premium, the individual or company requesting insurance must sign a premium finance agreement with the premium finance company. This is a loan contract that lasts for the life of the insurance coverage. The premium finance company then pays the insurance premium and bills the individual or company, usually in monthly installments, for the cost of the loan.

[edit] Benefits

There are a number of benefits to financing an insurance premium. [2] These include:

• Eliminates the requirement for a large up-front payment to an insurance company.
• Multiple insurance policies can be attached to a single premium finance contract, allowing for a single payment plan to cover all insurance coverage.
• Premium financing is often transparent to the individual or company insured. Brokers transmit the completed premium finance agreement to the premium finance company, and the policy holder is billed as they would be for any other typical insurance policy.

[edit] Dangers

Dangers of premium financing:

• Since the interest due on the money lent to pay premiums is tied to an index, usually the LIBOR (London Interbank Offered Rate) if interest rates rise, the total interest charge will rise as well. If the policy owner can't afford to pay interest payments then they stand to lose their insurance and be left with significant debt if the surrender value of the policy is less than the interest owed. [This danger is not accurate. Nearly all premium finance agreements have a fixed interest rate at the date of the loan. The payments and interest rate therefore do not vary for the life of the loan.]