The Best of Both Worlds: Insurance Premium Finance

Having your cake and eating it, too

We’ve all heard the tired old saying, “You can’t have your cake and eat it, too.” It suggests you can't have the best of two options.

With insurance premium financing, insureds can, in fact, have their cake (crucial insurance coverage) and eat it too—freeing up cash to manage and grow their business.

By leveraging the power of premium financing, insureds gain access to an additional source of low-cost capital. This enables them to reallocate the cash that might otherwise have been earmarked for a sizeable lump-sum down payment on property and casualty insurance. Without having to make a large advance payment, insureds can better manage their cash flow and even leverage the cash as operational capital—investing in people, equipment, facilities and expansion.

Conceptually, premium finance is simple. It's a loan product that taps into the underlying value of insurance coverage by leveraging the unearned portion of a policy for the collateral. How does it work?

As loans go, premium financing is a relatively straightforward process with simple loan documentation. The loan itself typically involves a two-page contract and provides funding within 24 hours of acceptance. Pricing quotes and repayment plans are shaped both by the economic environment and the financial health of the borrower.

If businesses are looking for a loan, it doesn’t get much simpler than that. What’s more, a premium finance loan doesn’t deplete bank lines of credit. For the most part, loans are paid back in under a year. There can also be positive tax implications, and, depending on accounting opinion, the disclosure is straightforward on financial statements.

Many insureds who choose premium financing are financially strong and use the product to manage cash flow efficiently. Others appreciate the availability of an additional lending source when they continue to face economic challenges.

Adding value to the agent insured business relationship

The benefits to the insured are numerous. But there are important benefits for the agent or broker as well, not the least of which is expanding the advisor/client relationship. As advisors, insurance agents are expected to help insureds manage risk. And lack of access to capital can itself be a business risk. By understanding a business insured’s capital needs, cash position, expansion plans and cash management sophistication, the advisor can offer premium finance as an insurance payment option, working with the premium finance company to tailor a unique solution. This could include multiple plans, plan by policy, delayed check release and a mix of down payment amounts and repayment schedules.

What to look for in a premium finance company?

You don’t have to look far to understand that agencies and premium finance companies share many of the same goals and benchmarks of excellence. Both want to retain insureds, differentiate service and grow their businesses. Both aim to demonstrate knowledge, industry expertise, flexibility and value. Both seek to understand insureds pain points and provide customized solutions as needed. Both are measured on quality and responsiveness. Both are sensitive to the communication needs of insureds, including frequency of contact and level of detail. Of all the benchmarks, knowledge and experience come out on top as indicators of success—knowledge and experience of insureds, of the insured’s business or books of business, and of relevant industries.

Questions that can lead to a useful discussion about premium financing

Agents and brokers don’t need to be premium finance experts to offer this product for value-added service, but asking a few questions such as the ones that follow helps uncover possibilities:

  • How did you plan your insurance costs for the year?
  • Do you have credit lines and what are their costs?
  • Are you anticipating unusual cash flows, whether seasonal or project-based?
  • Are you concerned about new risks, such as cyber attacks, and have you planned for the cost of additional coverage?

The answers to these questions will help you decide whether premium financing would be a real benefit and, if so, how it should be customized.

The ability to customize premium financing is all too often overlooked by agents and brokers unfamiliar with the ways it can be tailored to the needs of insureds. It’s one thing to be aware of premium financing as an option for insureds, but the flexibility of premium finance as a valuable additional source of low-cost capital shouldn't be underestimated.

Many business owners, CFOs and other insureds simply don't realize the simple, inherent value proposition of premium finance—it enables them to reallocate cash earmarked for insurance coverage, to other business needs. They can have their cake—necessary and important insurance coverage; and eat it too—avoiding lump sum advance payments and conserving their cash flow.

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