Wichita Insurance Agents | What Is Insurance Premium Financing?

The insurance market goes through cycles that drive ratings, costs, and coverage availability. A “soft market” is when insurance rates are low, and coverage is easily obtainable. A “hard market” is when rates are high and coverage is difficult to get. Some businesses have inherently higher risks and, therefore, higher premiums, regardless of the insurance market. Others are startups or expanding and need all the cash they can muster. In either case, paying an upfront insurance bill costing tens of thousands of dollars might be a revenue shock. Insurance premium financing is one solution our Wichita insurance agents suggest to retain capital while remaining adequately insured.

What is premium financing?

Premium financing is when a business borrows money for insurance premiums. Small and large companies use premium financing to free up cash for other things like reinvestment and expansion opportunities.

How premium financing works

The financing company initially pays the premium to the insurance carrier. Then the insured repays the loan to the premium financing company. Here’s an overview:

The business (the insured) gets a quote from the insurance carrier or carriers.
The insured secures a loan from a premium financing company (the lender) for the insurance carrier’s premium. Or they combine all the insurance premiums they have from multiple insurance carriers (commercial auto, property, directors and officers, etc.) and consolidate them into one loan.
The premium financing company pays the carrier’s premium or premiums in full.
The insured pays the premium financing company in installments per their loan agreement, which includes fees and interest.

Each state has its own usury laws dictating the maximum interest companies can charge. Most states regulate premium financing companies through the Department of Insurance or similar government bodies.

Why businesses choose premium financing

Premium financing is a financial strategy that works for some businesses but not others. Here are some of the reasons you might choose to finance your insurance:

Cash flow management. Premium financing helps you manage your cash flow and budget. Instead of paying significant upfront costs, you can distribute costs over multiple payments.
Investment opportunities. You can invest the lump sum, leaving you with the potential to generate returns on capital that would have gone to insurance premiums.
Credit. Premium financing won’t affect your existing credit lines, keeping your current credit arrangements intact.
One payment. You can combine multiple policies into one financed loan.
No collateral. Most lenders don’t require collateral for the loan since the underlying insurance policy is the security for it. If you default on your loan, the premier financing lender will take any refunds the carrier owes for the unrealized coverage, if the insurance contract allows. (See “Noncancellation and recovery of rights” below.)
Lower interest rates. Premium financing lenders offer lower interest rates than standard business lending institutions for other types of loans. Securing a loan and optimal interest rates depends on your business credit.

Noncancellation and recovery rights

Since premium financing pays insurance premiums, most states have protections against predatory loans. Premium financing offers assurances against cancellation for nonpayment. Depending on the loan terms, the premium financing company cannot cancel the insurance contract if a business defaults.

On the other hand, some premium financing companies retain the right to cancel policies and keep the unused premium (refunded) if a business defaults. It depends on the loan agreement and domicile state.

Premium financing use cases

Businesses facing liquidity constraints, seasonal cash-flow rates, or hefty insurance policies, such as corporate life insurance or liability coverage, could benefit from premium financing.

A commercial auto premium financing example

Let’s say your commercial auto insurance renewal is higher than budgeted. You’re required to carry a specific level of auto insurance for your operations.

Your Wichita insurance agents shop around and find an insurance carrier at your required levels. They also offer a 15% discount, but you must pay the premium in full.

You want the discount but don’t want to pay the premium upfront. You planned on using your discretionary savings to upgrade your fleet telematics. If you pay a lump sum toward the insurance premium, it will cramp your telematics upgrade. If you choose to pay monthly installments, you lose the discount.

Your agent suggests premium financing. You find a premium financing company that will loan you the premium at an 8% interest rate with low origination fees. You decide to finance your auto premiums using a loan, freeing up cash to upgrade your telematics system.

A key-person insurance premium example

Let’s say you’re a tech startup with a talented chief technology officer (CTO). If your CTO died, it would impact your company’s value and client base. Your business planner advises you to get a key-person policy on your CTO to cover the losses their departure would cause. The policy premiums are high, and cash flow is tight. You’ve line-itemed cash for expansion, not hefty insurance premiums.

Your Wichita insurance agents suggest financing the policy’s premiums. With premium loan financing, you can buy a substantial life insurance policy without making substantial upfront premium payments. You can pay back the loan over time with interest.

If your CTO dies, the death benefit from the key-person policy would first go toward paying off the loan balance. The remaining life insurance funds would go to your company, giving you a cash infusion to cover any lost revenue and time to recruit and train a replacement.

Strategic considerations of premium financing

Before you go all in on a premium financing arrangement, there are things to consider:

Interest rates. Interest rates are a key consideration in premium financing. Calculate whether keeping capital on hand outweighs the loan’s interest rate.
Financial stability. Premium financing depends heavily on the financial stability of the company. Decide if you’re able to meet the loan repayment obligations. Strategize your repayment schedules according to your expected cash flow patterns.
Long-term planning. Some policies, like key-person life insurance policies, can benefit from premium financing. The cost of the insurance premium, spread over several years, can be less than the potential revenue generated by investing that capital into business operations or growth opportunities.
Suitability. Premium financing isn’t for everyone. Consult your financial advisor and lawyer to evaluate the risks, benefits, compliance and tax implications.

Call your agent for information

Premium financing is a tool to mitigate the financial strain of insurance premiums while maintaining necessary coverage. Like any financial strategy, it involves risk, which you should carefully assess. Ask your Wichita insurance agents and attorney before financing your insurance premiums.