Insurance premium financing, IPF in short, is a loan product given to the insured to pay for insurance premiums in life insurance by a third party. This is done by signing an agreement between the customer, insurance company, who is the guarantor, and the bank which provides the money for the loan or simply finances the process (financier).
Premium financing is dedicated to finance life insurance. After signing the agreement, that can go up to a year or until the policy matures, the bank which is the premium finance company pays the premium and charges the customer or the company taking the loan and this is paid in monthly intervals.
The types of insurance premium finance in life insurance
Traditional recourse premium finance (estate premium-oriented)
In this, the customer agrees to a securitized loan with intent to hold that loan until the policy matures. This insurance premium is bought for estate exchangeability demand. Therefore, this can be very helpful to those customers that have a large net worth e.g. $5 million and above.
Non-recourse premium finance
This type of premium finance is available for the customer who may not have a high net worth but makes a goodly earning e.g. $200,000. Cash is the accepted security making it unsuitable for customers with illiquid assets. Also, the securitized investment may be held by the customer’s investment team so long as it is guaranteed with third party verification, yearly.
- Removes the demand for a large in-advance payment to the insurance company.
- Many policies can be placed in one premium finance contract that make it easy to pay for all insurance coverage once.
- Financing is an open process to the insured thus no money can be lost in the process.
The risks involved
The risks associated with insurance premium finance are:
The customer must qualify to have their loan renewed each time. In the event that the security falls below a certain point, the customer will have to provide more collateral to secure the loan. Also, the loan can be offered at a higher rate than what was previously offered. Whatever it may be, there can be risks due to the policies or change of these policies by the bank.
Interest rate risk
Depending on the economy, the interest rates of the bank may rise or fall. In the event that the interest rates rise, this will be a disadvantage for it will take away the benefits that a customer intended to have in the first place.
Policy earning risk
In the event that the policy of the insured is willingly terminated before maturity due to the loan, the customer will incur the cost of providing more security to pay off the loan debt.
There are many businesses that would like to explore this scheme and have their families secured and also want good retirement benefits. Therefore, using insurance premium financing can be effective in achieving their goals but before taking this route it is important to consider the factors involved.