Insurance Premium Finance

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Insurance premium financing is the solution for companies whose insurance carriers require that the policy premium be paid in full at inception. While many insurance carriers will offer their insureds payment options, there are still those that do not offer alternate payment terms. There are also certain types of policies, such as General Partnership Liability and Directors’ and Officers’ Liability, that must be paid in full. Insurance costs vary by company, and with some companies paying hundreds of thousands, or even over a million dollars in premium, making a one-time payment can create a significant strain on cash flow.

What are the benefits of premium finance to my company?

Maintaining adequate cash flow has been a high priority for many struggling businesses during the recent economic downturn. Bank failures and restrictions on lending have made it even more difficult to obtain the resources needed for companies to stay in business. Obtaining a premium finance agreement to pay for insurance costs allows an insured to pay for insurance as it is used. It also gives the assurance of full coverage without the burden of a lump sum payment. This preserves working capital to be used for other short-term obligations.

Premium finance vs. the traditional loan

Premium finance agreements offer more flexibility than standard loan agreements. There are many instances where insurance coverage is purchased through several different companies. In this case, there is no need for multiple agreements to be put into place. All policies will be consolidated into one loan, and a single payment will be made each month to the premium finance company. There is also the flexibility to amend the loan agreement if policy changes are made mid-term. For instance, if a new coverage is purchased after the effective date of the agreement, the new policy premium would be added to the existing agreement and the installment payments would increase to account for the new premium being financed. Separate payments would not have to be made to the financing company for any changes made mid-policy term.

Obtaining a conventional loan often requires application, closing, and legal fees, along with multiple pages of documentation to be signed. A premium finance agreement is a two-page document that has no additional fees associated with it. Premium financing can be treated off-balance-sheet as a reduction in prepaid assets rather than an increase in liabilities depending upon accounting standards. Financing insurance premiums also creates an additional line of credit without disturbing the established borrowing arrangements. The interest on premium financed may be tax-deductible, creating additional revenue and offsetting the cost of insurance.

There are cost advantages associated with premium financing. Interest rates are fixed and competitive compared to what traditional lending institutions will offer. Rates are also guaranteed at the time that the financing terms are quoted. Unlike most loan agreements, there are no penalties if the loan is prepaid, giving the option to pay down the amount financed if additional funds are available. Premium finance agreements do not require any compensating balances that, in a traditional loan agreement, increase the effective cost of the loan by tying up additional funds.

What are the benefits to the insurance company?

There are also cost advantages to the insurance company if premium financing is chosen over a carrier installment plan. The carrier will receive the full premium up front rather than over the course of the policy term. In some instances, when the carrier is aware that the insured would like to finance the policy, they will lower the premium to offset the interest that will be paid in the finance agreement.

The process

A premium finance agreement can typically be set up within a matter of hours. The financing company is given the name and address of the policyholder, the type of business, and form of ownership. In some cases, they may require a review of audited or interim financial information. Policy and premium information is then used to formulate the terms of the loan, including the down payment required, the number of installments, and the annual percentage rate. Once an agreement is reached, the insured will pay a down payment on the financed premium, and the financing company will fund the remaining amount. The insured will then make monthly installment payments to the premium finance company. Typical installment plans are 25% down and nine installments, ten equal payments, or twelve equal payments. Equity Risk Partners has relationships with several premium financing companies. We will work on your behalf to provide the necessary information to the financing company and obtain the most competitive terms. The advantages of premium financing over prepaying insurance costs or obtaining a traditional loan are compelling and provide another resource to ensure that your company is using its financial resources efficiently.

 For more information, please contact Bob Zenoni at (415) 874-7109 or rzenoni@equityrisk.com.