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What is Insurance Premium Financing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 September 2016
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    2003-2016
    Conjecture Corporation
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Insurance premium financing is a process that involves obtaining the services of a lender to make premiums on some type of insurance plan, typically a life insurance policy. The idea behind using this strategy is to maintain existing cash reserves rather than diverting all those funds to making premium payments. Doing so makes it possible to use those reserves for investments that ultimately generate additional revenue that helps to provide the insured party with a higher level of financial security. When arranged properly, the cost of insurance premium financing is offset by the gains generated by being able to use cash reserves to buy stocks, invest in real estate, or some other activity that generates a steady stream of revenue.

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The process of insurance premium financing is relatively straightforward, with the insured party securing financing from a lender who specializes in this type of activity. Typically, the loan will include a fixed rate of interest that is applied to the outstanding balance and installment payments that are significantly lower than the monthly, semi-annual, or annual payments due on the insurance coverage. Once the loan is approved, the premiums associated with the insurance plan are settled using the proceeds from the loan, freeing up the insured party’s cash reserves for use with other financial deals. Most loans of this type can be settled at any time, meaning if the insured party does make investments that generate greater returns than anticipated, the loan can be settled early and save a significant amount of interest.

Assuming that the individual uses his or her cash reserves wisely, it is possible to generate additional profits from those reserves that cover the cost of repaying the insurance premium financing. Under the best of circumstances, this results in effectively maintaining the coverage at no real cost to the insured party. As a result, he or she enjoys the security of having insurance that can be called upon when and as needed while still making the most use of available financial resources.

There is some risk involved with insurance premium financing. Should the policyholder fail to generate returns from the investment of his or her cash reserves that were not diverted to securing the insurance, the ability to achieve the greatest degree of benefit from this arrangement is lost. Should those investments actually decrease in value, the individual may be left with a reduced amount of financial assets, a loan that must be repaid, and an insurance plan that may or may not have enough cash value to aid in getting through the period of downturn. While insurance premium financing is often a good strategy, it is a good idea to consider both the pros and the cons before seeking this type of arrangement.

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