The Impacts of Insurance Premium Financing

Just like every other loan, insurance premium financing has its impacts. The impacts may either be positive or negative and they may be risks or benefits 

Insurance premium financing refers to the short term loan one is allocated in order to get the funds to pay for their insurance premiums PFS.com

How the financing works 

It involves three parties; the insured, the insurer and the premium financing company. The insured is the party that has insurance while the insurer offers the insurance cover. The premium finance company is the third party that provides the credit to fund the premiums 

To get started, the insured signs a premium finance contract with the premium finance company as per the terms and conditions. From henceforth, the premium finance company pays the due insurance premium directly to the insurer as per the loan cost. The insured who now becomes the borrower then makes their payment to the premium financing company as per the amount billed instead of the insurer 

There are many circumstances or conditions that may make one to secure premium financing; 

Circumstances under which an insured seeks insurance premium financing 

When the insured is unwilling to liquidate their other investments in order to finance the regular premiums 

When there is a need for a huge amount of life insurance coverage for the purposes of business 

When one meets the lender’s guidelines on underwriting  

There are numerous benefits and risks for seeking insurance finance premiums, these are; 

The benefits 

Burden  

At times, one might be asked to cover an up-front premium payment which might be so large thereby becoming a burden. This premium financing helps relief the load of up-front premium payments 

Liquidity 

As mentioned above, the need for liquidity might push one to seek insurance premium financing. This premium financing thus allows for one to obtain coverage without necessarily having to liquidate their other assets. As such it helps one to stay afloat and allows for cash flow 

Time  

Since this financing can attract several insurance policies to a single premium finance contract, one can cover the entire insurance cover in the shortest time possible. As such it gives access to annual insurance cover 

Opportunity cost 

The main benefit of premium financing, it helps one save on the opportunity cost. The out of pocket money that could have been used to pay for the insurance premium can instead be used to pay for other investments’ installments that offer higher return rates 

The risks 

Fluctuations in collateral value 

With the changing economic conditions, the collateral value is ever under re-evaluation. In case the collateral value is below the standard rate, the insured is forced to provide more assets in order to stabilize the value of their collateral. This instability creates a disturbance in the liquidity of the assets of the insured 

Volatile interest rates 

Most premium finance contracts come with variable rates of interest. High interest rates are an extra cost to the insured as they exceed the loan balance. These accumulated high interest rates and exceeded loan balances make the premium financing expensive in the long run 

In summation, if the insured has enough assets to counter these risks they will enjoy the benefits of insurance premium financing without feeling the hefty pinch of the risks.