Premium financing

Large commercial insurers often require the annual premium in one payment at inception. For a company, it is a significant cash outflow; for a wealthy individual insuring a multimillion whole life policy, it is tied-up capital. Premium financing meets this need. A specialist lender, often linked to a broker or a bank, pays the premium to the insurer, and the insured repays it in monthly installments with interest. The lender's security is unusual: the insured grants it a power of attorney to cancel the policy on default and collect the unearned premium the insurer returns. The mechanism is widespread in the United States and the United Kingdom, for commercial property and casualty as for high-net-worth life insurance. In France, installments are more often offered by the insurer itself, with a surcharge. Financing raises several questions. It adds a cost, the interest rate, which the insured must compare with any discount for paying in full. It creates a risk of abrupt cancellation, leaving the insured uncovered after a mere delay. And in life insurance, borrowed-money structures can become ruinous if rates rise or the policy's value disappoints.