Premium financing is when a company or person is given funds to cover insurance premium costs. For the premium to be financed an agreement must be signed with the insurance premium financing company which is regulated by The Non-depository Division of the Office of Financial Institutions [“OFI”].
The agreement usually lasts from one year to the maturity of the policy. Your premiums are paid in full on your behalf by the premium finance company and then throughout the year you repay the company on flexible terms by doing monthly installments that are spread out.
Commercial premium finance – in this type of finance the loan taken covers the premium costs of the insurance. The company is able to manage and control the money used.
Life insurance premium finance – in this type of finance policy premiums are paid using third party loans. This will mostly works out for high net worth individual who does not want to liquidate their assets especially if the life insurance is costly.
As we know insurance companies may not give you an option of paying monthly installments. The question you would be asking is how do you qualify for Premium Financing?
As a client how do you qualify for Premium Financing?
- You must have a high net worth that will also give you collateral when getting the loan
- You should be under the age of 70 years
- If you limited in cash and liquid assets but you are wealthy
- You must have appreciating assets
- If you are in need of a life insurance
- If you have beneficiaries and you would like to leave your assets to them
Benefits of Premium Financing
- It helps you in eliminating the need to give large amounts of money the insurance company
- It prevents you from liquidating other assets especially in a company
- You are able to improve your cash flow.
- You can use a single premium finance contract with a single in cases where you might have multiple insurance policies
- You are able to keep up with the payments as you are not required to give the full amount upfront
- The rates may increase with time and may affect the premiums. This means you as the client you will be required to give collateral to make up for it or add more money
- The entire loan may be cancelled if your collateral does not match up to what is required or falls below
- In some cases the benefit you may get in case of death may be less than what you expected
- You premiums are more costly when the amount in the insurance policy is high
- When the interest rate increases, your cash value may not necessarily increase
With all this in mind you may still ask wonder if premium financing is worth it. The risks may somehow make you think twice but on the flip side it gives you the benefit of enjoying flexible payments and you get some breathing space as you manage your cash flow.