Premium financing is a type of loan where a company, or a person, borrows money to pay the premiums on an insurance policy. The policy itself is the collateral for the loan, and the borrower pays back the loan and any accrued interest after the policy generates enough surplus cash value.
It can be a real solution for a person or a business with significant insurance needs, but it also provides a huge opportunity for new revenue streams for insurance services providers.
Benefits
Premium financing provides several benefits for all parties involved in the agreement: borrower, lender, insurance carrier and premium financing company.
For the customer, premium financing provides more flexibility. They can still have the protection of insurance for whatever they need it for — asset protection, employee benefits, life insurance and so on — while retaining the cash or other assets that they would have otherwise had to pay in premiums. They can use that for higher-yield investments, business growth or other priorities.
For the lender, premium financing provides a secured, long-term loan with a predictable return.
For the insurance carrier, premium financing provides the premiums they need. It also makes it easier to close the deal — the customer is not facing a large up-front fee. Premium financing provides the carrier with better cash flow and higher margins. It also frees them from a perennial problem: days of outstanding sales or payments. This can be a major problem, straining cash flow and hindering business growth.
Insurance services agents and brokers can realize similar benefits in easier sales and better cash flow. It also creates a new revenue stream and profit center for the insurance services provider or agent. Effectively, the insurance services agent can create a new company with no investment of capital, capturing the revenues of arranging premium financing.
The right insurance services customer
Premium financing isn’t the answer for every person or business that buys insurance services. The right customer:
- has at least $2 million in net worth
- requires a substantial amount of insurance for business protection, employee benefits, life insurance, asset protection and other needs
- wants to retain existing capital and cash for other uses, such as cash flow and business growth
- is insurable at standard or better rates
Setting up premium financing
Every premium financing arrangement is different, tailored to the needs of the customer. Once they’ve determined their needs, the insurance services provider and customer work out the right policy, carrier payment and loan terms, and find a lender.
When all parties agree to the terms, the lender pays the premium to the insurance carrier. After the policy generates enough surplus cash value, the owner of the policy refunds the loan to the lender.
Opportunity for insurance services agent
Setting up premium financing for a customer opens up new opportunities for insurance services providers. Rather than turning to another company, you can set up your own premium finance company with no capital outlay, no extra work and minimal risk. Ask us about out total turnkey solution for premium financing, and create a new profit center today.