Managing finances can get complicated when operating a business. According to research conducted by WePay, approximately 41 percent of businesses reported having experienced cash flow issues.
When cash flow availability is low paying for expenses, such as insurance premiums, can be difficult; that does not mean that a business should go without protection.
Insurance premium financing is available to businesses that need assistance with covering the cost of insurance premiums.
What Is Insurance Premium Financing?
The concept of premium financing is not new; in fact, it has been available for decades. Traditionally, insurance premium financing involved the use of non-recourse loans that were used to fund the policies and the policyholder did not need any collateral besides the policy itself.
Unfortunately, fraud and other challenges resulted in non-recourse premium financing no longer being accepted as a financing option. Today, modern insurance premium financing is a practical and effective way to help businesses that have a legitimate need for insurance.
When properly structured, this type of financing enables an insured party to spread their insurance premium payment over the term of a policy rather than paying the entire premium upfront. The insured then repays the lender based on the agreed-upon terms which usually consists of a down payment followed by a series of installment payments.
Insurance premium financing provides businesses with a wide range of benefits. Business owners are able to enjoy improved cash flow and asset liquidity.
This financing offer also serves as an additional source of borrowing and generally does not have an impact on the availability of any existing credit facilities. Insurance premium financing also makes it easier to keep up with premium payments as the entire amount is not required upfront.
How Does Insurance Premium Financing Work?
Insurance premium financing is essentially a loan that a business takes out to purchase an insurance policy, such as life insurance or a retirement policy. The loan is secured against the cash surrender value of the acquired insurance policy. Many third-party lenders offer insurance premium financing, including many private banks and finance companies.
Premium financing is an effective strategy used by many types of purchasers, such as high net worth individuals, entrepreneurs and business owners. Financing the majority of the upfront cost of an insurance policy ensures that business owners do not need to cash in or sell their assets to pay for the entire cost of the insurance policy upfront.
This means that the business can enjoy the protection of the insurance policy without having to negatively impact their cash flow or assets.
When a business receives funds to pay an insurance premium, the borrower is required to pay, on an annual basis, the interest on the loan. In some cases, a finance program will allow the interest to accrue; however, this option comes with certain risks. The borrower will also have to put up collateral to secure the loan. The first asset generally put up for collateral is the policy itself; any shortfall will need to be compensated by other outside assets.
Some lenders allow borrowers to meet the collateral requirement with a letter of credit from another financial institution.
Why Choose Insurance Premium Financing?
There are several reasons why a business owner may choose to engage in insurance premium financing. The most common reason this financing option is so popular is because it allows businesses to attain a large amount of insurance without having to significantly impact their cash flow or liquidate their investments to cover the expense.
Business owners are able to maintain the use of their cash flow and use it for operations or to grow the business.
Depending on the specific policy and the amount of coverage needed to protect the business, an organization may be required to pay hundreds of thousands of dollars per year in insurance premium costs.
Although a business may be worth more than that, not all businesses have adequate liquid capital available to pay high-cost premiums or may not be willing to liquidate their assets to cover the expense.
With insurance premium financing, business owners can attain the insurance coverage they need while keeping their assets intact.
Choosing an Insurance Premium Finance Program
When choosing an insurance premium finance program, there are several factors to be carefully considered. First, a business owner must review the cost of the loan; in some cases, the cost of insurance premium financing may be too significant and not a good return on investment.
A business owner will also want to consider if the program has a suitable exit strategy. The cash values of the policy are often the source of paying off the loan, a good program should provide borrowers with the ability to pay off the loan directly from the policy itself.
Carefully review the terms of the agreement before making a decision as there are both risks and benefits involved in insurance premium financing.
Insurance premium financing is best suited for borrowers who have a long-term need for insurance coverage. Borrowers should also have the ability to sustain the requirements of the program and provide the minimum amount of collateral needed to secure the loan.
Insurance premium financing generally has a specified term length and the policyholder is ultimately responsible for the loan during the repayment period.
Speak with an Experienced Benefits Consultant
Insurance premium financing can be an excellent solution for many types of businesses that cannot or do not want to pay high-cost insurance premiums out-of-pocket.
When participating in an insurance premium financing program, business owners will be responsible for minimal out-of-pocket cash costs, minimal out-of-pocket collateral and will be able to maintain control of their assets. Businesses can also enjoy ample insurance protection for their business and its key employees.
Premium financing does add a level of risk and complexity to business insurance but it can also be a useful tool.
To learn more about how insurance premium financing works or to speak with an experienced benefits consultant about premium financing options, reach out to the Business Benefits Group today.