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Almost all of the major insurance companies offer their retail clients monthly payment options.
Whether it’s your car or your home, or even your life insurance, paying by the month is easy.
But when it comes to business and commercial insurance, you will find that most insurance companies do not have a monthly option.
Premium Funding
There is still a way to pay monthly however, and it is commonly known as premium funding, or premium financing.
Premium funding enables you to pay for virtually any insurance policy monthly, even if the insurance company does not offer a monthly option.
Essentially the premium funding company pays the full premium on your behalf, and you then repay the funding company with monthly payments over the course of the year.
Some of the main benefits of premium funding are as follows:
- Spread your insurance costs over a longer period
- Pay for multiple insurance policies with one monthly payment
- Smooth out your monthly business cashflow
- Obtain a tax deduction on interest paid for business policies
How Does It Work?
Your insurance broker will put your policy in place as normal, but instead of giving the invoice to you to pay, they will setup a contract with a premium funding company (‘the funder’).
The funder will then pay the full premium to the insurance company, and it will be your responsibility to repay the funder over a period of up to twelve months.
Ultimately this is a form of financing, hence why the product is sometimes referred to premium financing.
As with all types of financing there will be an interest rate which applies to the contract. The interest rate is almost always a fixed rate and will be confirmed at the time of taking out the policy.
The most common term for a premium funding contract is ten months. This means that you must repay the funded amount within ten months.
It is also possible to repay the amount over twelve months, which is great from a cashflow perspective however the fees and charges can be higher in some cases when compared to a ten month contract.
How Are Monthly Payments Calculated?
Although the specific method can differ from one premium funding company to the next, the basic method is generally quite consistent.
Interest applied to a premium funding contract is generally calculated as ‘simple interest’ which means that it does not compound. This makes the repayment calculation very straightforward.
The following example shows how a typical repayment would be calculated.
ANNUAL INSURANCE PREMIUM ($1000)
Funding Contract Term (12 Months)
Funding Contract Setup Fee ($30)
Funding Contract Interest Rate (15%)
Total Interest Charge ($1000 x 15%) ($150)
Total Amount Payable (Premium + Fee + Interest) ($1180)
Monthly Payment (Total Amount Payable / 12 Months) ($98.34)
For many small businesses, the idea of paying $98 each month rather than $1,000 upfront is quite attractive.
As an added bonus, the interest charged on a premium funding contract will be tax deductible provided that the insurance is for your business.
Important Factors to Consider
The most important factor to keep in mind is that paying your insurance monthly via premium funding will be more expensive than paying the full amount upfront.
It’s also important to know that if you cancel your insurance, your monthly repayments will not necessarily stop immediately.
What will happen is that the funder will receive any refund from your insurance company after the cancellation, and will then calculate whether or not any money is still outstanding.
There are a few factors which will impact upon how much is still owing, but generally speaking you could expect to pay at least one more monthly payment after cancelling your insurance.
When you enter into a premium funding arrangement, you are entering into a formal contract.
You won’t always be required to sign a copy of the contract, but the contract is certainly enforceable if you choose to stop making repayments for any reason.
Should I Use Premium Funding?
If you prefer the idea of spreading your insurance costs over the year rather than paying upfront, premium funding could be a great option for your business.
Even if you do have enough cash set aside for your insurance, by utilising premium funding you may be able to invest that money to make improvements in other areas of your business.
For any business which has cashflow concerns, especially small businesses, premium funding can be a great way to smooth out our costs and improve your cash flow.