Paying commercial premiums: installments and premium financing

You have four ways to pay a commercial premium: in full, in installments through the carrier, through a premium finance company that lends you the money and pays the insurer, or, for workers' compensation, as you go on actual payroll. Premium financing works like a short-term loan secured by the unearned premium. It spreads cost, but it adds interest and fees, and the lender usually holds the right to cancel the policy if you miss a payment.

The options compared

Which is available depends on the carrier, the line, your state and the size of the account. Ask your broker at quote time, not at binding. Terms vary too much to quote a typical rate or down payment, so get the numbers in writing.

How premium financing works

1. The policy is quoted and bound. The insurer's premium is due, subject to its terms. A binder often requires prompt payment or a down payment.
2. You and the agent sign a premium finance agreement. It lists the premium, the down payment, the amount financed, the finance charge, the annual percentage rate, the number and size of installments, fees and late charges.
3. You pay the down payment. The finance company pays the rest of the premium to the insurer, so the insurer treats the premium as paid.
4. You repay the lender. Payments run through the term, often in nine or ten monthly installments, to leave a cushion before expiration.
5. If you default, the lender, using the power of attorney in the agreement, can ask the insurer to cancel the policy after it gives the notice state law requires. The insurer returns the unearned premium to the lender first.
6. At the end, the loan is paid off and the policy has run its full term.

Premium finance companies are regulated by state law, and most states license them. Because a finance agreement is business-purpose credit, the federal Truth in Lending Act generally does not apply to it (15 U.S.C. § 1603(1) excludes credit extended primarily for business, commercial or agricultural purposes, per Cornell LII). State premium finance statutes govern the disclosures, the allowable charges and the cancellation process, which is a reason to read the agreement carefully.

A cost example (hypothetical)

Say a contractor's package policy premium is $60,000 and it puts down 25%, or $15,000. It finances $45,000 over nine monthly installments at a hypothetical 8% annual rate with simple amortization. The monthly payment is about $5,168, total payments are about $46,513 and the finance charge is about $1,513, before any setup or late fees. The 8% rate is invented to show the arithmetic; real rates and fee schedules depend on the lender and are limited by state law. Compare the all-in cost with what a bank line of credit would charge, and use the premium finance calculator to test your own numbers. Fees raise the real cost, so ask for the APR, not just the monthly payment.

What happens when a payment is missed

Missing a payment starts the lender's cancellation process, and state law sets the minimum notice. In Florida, for example, the premium finance company must mail at least 10 days' written notice to the insured before asking the insurer to cancel, and the insurer must pay the unpaid finance balance back to the lender within 30 days of the cancellation date, sending any remainder of the unearned premium to the agent or insured (Fla. Stat. § 627.848). In Ohio the insurer has up to 60 days to return gross unearned premium to the finance company, and the lender need not refund an excess of less than $3 (Ohio Rev. Code § 1321.82). The numbers differ by state, so ask your broker what applies to you.

The practical dangers are bigger than the notice period:

• A lapse can breach your contracts. Leases, loan agreements and customer contracts require continuous coverage, and certificate holders may be notified of cancellation. See policy cancellation and nonrenewal: notice periods and your rights.
• Required coverages can lapse. Workers' compensation, auto liability filings and professional requirements have regulatory consequences when coverage ends. State rules vary; the workers' comp and benefits requirements by state helps with workers' comp.
• The refund may not cover the balance. If the policy has a minimum earned premium, or the insurer applies a short-rate penalty on cancellation, the unearned premium returned may be less than the loan balance, and you owe the difference.
• A cancelled policy can be hard to replace. A new carrier will ask why your prior policy ended. A nonpayment cancellation appears on the application and may affect pricing and terms.

Premium financing and audits

Audit premiums are billed separately and are often outside the original finance agreement, so the additional premium after a premium audit is typically due on the insurer's billing terms, not spread over the old installments. Mid-term endorsements that add premium may also be billed separately or require an amended agreement. Ask the lender and the agent how endorsements and audits are handled, and plan for cash.

What to check before signing

• APR and total finance charge, and whether the rate is simple interest or an add-on rate.
• Down payment and the number of installments, and whether the final installment falls after the policy expires.
• Fees: setup, late, returned payment, cancellation and reinstatement.
• Power of attorney and notice language. What exactly can the lender do, and when?
• What is financed: premium only, or also taxes and fees, such as surplus lines taxes.
• Multiple policies. Cancelling one financed policy can cause the lender to cancel others in the same agreement if they are cross-collateralized.
• Licensing. Confirm the finance company is licensed in your state, where licensing applies.
• Prepayment. Whether you can pay early and whether a charge applies.
• Refund handling. How unearned premium and any excess are returned.

Ways to reduce the need to finance

• Budget by month. Put premium in your operating plan; see how to budget for business insurance.
• Ask about payroll-based billing for workers' comp.
• Time the renewal. If the premium due date lands in a cash-poor season, ask whether the policy period can be adjusted at the next renewal.
• Right-size the program. A higher deductible or a narrower program lowers the premium to finance. The deductible and retention break-even calculator shows the tradeoff.
• Negotiate payment terms, along with price. See how to negotiate a business insurance renewal.

A caution about terminology: "premium financing" is also used for borrowing to pay premiums on large life insurance policies. That is a different, more complex arrangement and is not what this guide covers.

Key takeaways

• Premium financing is a loan from a licensed lender that pays the insurer, with the unearned premium as security and a power of attorney that lets the lender cancel on default.
• Business-purpose credit is generally outside federal Truth in Lending rules, so state premium finance law and the agreement govern. Ask for the APR and every fee in writing.
• State law sets the notice before cancellation and the deadlines for returning unearned premium, and those timelines differ; Florida requires 10 days' notice, for example.
• A cancellation for nonpayment can breach contracts, lapse required coverage and complicate replacement, so treat installment due dates as hard deadlines.
• Audit premium and endorsements are often billed outside the finance agreement, so plan cash for them.