Published on 09/01/2020
Financing in its simplest form means lending money to the borrower for the specific use of funds, i.e. a loan. Premium financing is a type of loan extended to the company or the individual to cover the cost of an insurance premium. There are three parties involved in this entire transaction—the financer, the insurance company, and the insurance policyholder. Many times, the insurance company often offers premium financing services too. Such services are useful for individuals who would not like to liquidate the assets to pay the premium and get the required insurance cover.
How does it work?
The insurance policyholder has to sign an agreement with the premium financing company to lend the amount of premium. The financer then pays the premium amount directly to the insurance company and bills to the policyholder usually in monthly installments (very similar to an EMI transaction on any other loan finance arrangement).
Amidst crisis-like situations, generally, the interest rates are lowered by the central government to support the demand in the economy by providing superior liquidity in the system. Premium financing arrangements are even more attractive in times like this when the interest rates are lower.
What are the benefits of a Premium financing arrangement?
- It eliminates the need to pay a large upfront insurance premium by the policyholder to the insurance company.
- The insurance policies can be combined and mapped to a single premium financing agreement.
- It is beneficial for individuals to get the required insurance cover without liquidating their assets.
- The benefit of leverage comes handy as the savings in opportunity cost, i.e. the cost of capital on owned funds is much higher than the leveraged funds.
Why has premium financing flourished recently?
Well, no one would have expected the quantum of financial loss in the year 2020 on account of shutdowns, lockdowns, etc. There have been instances of high unemployment, inventory shortages, bankruptcies, lower interest rates, etc. All these indicators have supported the advent of premium financing arrangements. During times like these, individuals would prefer to retain more of their assets in hand and in liquid form to suffice the immediate financial needs, given an uncertain future.
Demand and need for an insurance product have increased because of a health crisis. COVID-19 being a health crisis, a large percentage of the population has moved towards life insurance to secure a financial future in case of uncertainty. The demand for life insurance and related products has increased tremendously, and with the job cuts, the individuals want to keep more of their financial assets handy and liquid. Therefore, the premium financing arrangements with low-interest rates prove to be good financial support since it does not affect the existing budgets, investments, and finances of the policyholders. Premium financing companies resolve such issues by lending the required capital at historically low loan rates to fund their premium and get the necessary insurance coverage.
The team of premium finance experts at MyTaxFiler can provide exceptional support with all your policies and premium financing arrangements. From the initial consultation to assist in providing the quickest financing arrangement in the industry providing service and support after the sale, MyTaxFiler partners with you to offer premium solutions for all the customers.
For more details on premium financing arrangements on an existing case or a new case, get in touch with MyTaxFiler at email@example.com.