What is Premium Financing?
Premium financing is an insurance funding arrangement whereby a policy holder borrows funds from a financial institution (usually a bank) to pay the premium of a new insurance policy, and in doing so, assigns all or part of the rights under the proposed policy as collateral to the financial institution. In general, the policy holder is only required to pay part of the premium out of his/her own pocket and settle the remainder of the premium via a loan from the financial institution, and is, to some extent, similar to buying a property with a mortgage loan. This method of using a loan to finance the purchase is also known as “leveraging”. In a low interest rate environment, the policy holder can borrow funds from a financial institution at a lower cost and invest them in an insurance policy with a higher return to profit from the spread.
Since the policy is pledged to the financial institution, any policy benefits paid by the insurer (e.g. the surrender value and death benefits) have to be first used to settle the outstanding loan amount and interest, with the remaining balance (if any) then goes to the policy holder or the beneficiary.
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