This financing program focuses on providing loans or finances to insurances taken by people. There are separate companies that deal with premium financing or the insurance companies sometimes tie up with the premium finance providers providing both under the same roof. The loans are provided by a third party who solely works with providing premium financing. They are mostly chosen when the interest rates are low.
How does it work?
This is mostly opted to pay off high pricing life insurances owned by high-net-worth individuals. They can be chosen by people of any age group ranging from 28 to 75. They should have a high net worth almost above $5million. The insured or the borrower who requests the premium finances is supposed to sign the agreement with the premium financing company who later provides the support to pay up the premium amount, whom the insurer pays back in small installments for the total premium amount.
This can last for a year or lifelong depending on the type of plan chosen. The policyholder or the insurance company can find a premium financing company who helps the insurer to pay the premiums with an initial minimum cash flow. This in turn can help the insurers to keep their capital focused on to high yielding assets and maintain flexibility in cash flow without having to remove or keep aside a bulk of the money to pay premiums. The interest obtained through these assets is mostly higher than the premium amount and the loan amount thus helping the insurer gain more profit through both systems.
How to decide whether to go for premium financing?
Insurances, mainly life insurances are taken to make sure that the insurer’s family does not face any financial crisis after their death. In cases where the insurance amount is huge, chances are that the premium also is a higher amount. Even though the premium can depend upon the type of the policy, its duration, the health conditions of the insurer, etc. Most people with low income and a normal running family with good health conditions do not opt for a high insurance amount and hence might not require the help of a premium financing company.
However, a person with a high net worth who chooses a high insurance amount will have to end up paying a higher amount of money as a premium per year which could be concentrated to some other assets if not paid as premiums. In such a scenario, it is best to choose premium finance for the premiums to be able to have an unlimited cash flow without giving up on the assets to pay up premiums.
There can be certain risks to opting for premium financing. It is important to understand the several risks that underlie this system and to plan accordingly. One can also take the help of an advisor or a planner to undertake the kind of risks involved and to plan and execute the best ways to earn more profit. You can learn about premium financing in details online.