|
|
Financing Premiums - Insurance Terms - Financial Directory
|
|
What is premium financing? When you finance an insurance premium, you enter into a contract with a lender to obtain a loan. You make a down payment usually at least 15-20% of the total premium and the lender agrees to pay the insurance company the balance of the premium. You agree to repay the lender in installments according to an established schedule for the amount of the loan (principal), plus interest and any fees.
Premium financing is not an insurance policy, but a means of financing the purchase of insurance. There are other costs associated with the purchase of premium financing such as interest charges, late fees, cancellation fees, and broker fees. The contract exists between the borrower and the lender, not the policyholder and the insurance company. Repayment of the loan is made directly to the lender by the borrower. This means that you'll be expected to repay the loan even if you have a dispute with the insurance company and/or the broker.
Should I pay my insurance premium, on a less than annual basis?
Financing an insurance premium, like financing any consumer
purchase, is an individual decision based upon economic
considerations. For some it is a convenient way to pay for
insurance. Others simply do not have the means to pay in advance.
But premium financing is expensive. Before you sign a contract, you should explore other less costly options. Your agent or broker is required to disclose the premium paying options, if any are available, for the insurance you are purchasing. For example, many insurers accept credit cards, which may have lower interest rates than those charged by premium financing companies. Also some insurers provide their own "in-house" financing allowing you to pay in installments for a small fee. Interest rates may be lower (or not applied at all) for this type of loan. If you have policies through the California Automobile Assigned Risk Plan, you can pay the insurer in installments at no interest, after a down payment.
Before you agree to finance your premium, ask what interest rate and related charges youÍll be paying. The Federal Truth In Lending Act (TILA) and the California Insurance Code require disclosure of all finance charges and the Annual Percentage Rate (APR), which is the cost of the loan over a full year expressed as a percentage. Make sure that you receive this information, as it allows for easy comparison of loan interest rates.
A premium financing agreement may also include the financing of a "broker fee". This charge is usually made to you by the broker for placing insurance with an insurance company. Your agent or broker is required to obtain your signature on a payment options disclosure form to assure you have been given the information. He must also provide you with a copy of that form. If the transaction is conducted by telephone, the agent or broker is required to mail the disclosure form to the insured within 72 hours to the address provided by the applicant.
How does premium financing work?
When an insurance company finances a premium
"in-house", payment plans are set up allowing the
insured to pay in installments over a specified period. Interest
or a per-installment fee is charged.
When a bank or premium finance company provides the loan, a 20 percent down payment is usually required. For commercial insurance policies, this may only be an estimate of the final premium amount.
The insurance agent or broker selling the policy can arrange for the premium financing agreement. Some agents will ask if you want financing and then complete and sign a finance agreement for you. This can only be done if the agent or broker has been given your permission through a signed agreement to do so. This is usually done in the form of a broker agreement by a broker who is not an agent for the insurance company. The agreement gives the broker power-of-attorney to sign on your behalf any documents relative to the purchase of insurance. In deciding whether to follow an agent's recommendation on premium financing, keep in mind that the agent often receives a fee from the lender for each loan written.
Do not let the agent (or anyone) sign your name to a
contract! Read the agreement and decide for yourself if it is in
your interest to sign. NEVER LET AN AGENT SIGN YOU UP FOR A LOAN
YOU DON'T NEED!
A finance agreement should include the
following information:
The lender must provide the borrower with a disclosure statement. This is usually provided through the broker or agent who completes the finance agreement for you which also must be signed by you or your broker or agent. It is imperative that you read and understand it, especially if the agent or broker completed the finance agreement for you.
The disclosure statement contains important information on the costs and terms of the loan. Make sure you understand all provisions, including the payment schedule, finance charges and APR. Find out what charges could result if you don't pay on time or want to cancel your policy, especially since your insurance company and broker and agent are responsible for returning monies to the premium finance company in a timely manner. Also, what happens if you want to pay off the loan early? Some lenders impose a fee if you pay off the loan in advance. And some require that part of the finance charge is "earned" by the lender on approval of the loan. This means that if you later change your mind about the insurance, the lender gets to keep the entire "earned on approval" fee.
Once the lender accepts the finance agreement, it pays the premium balance to the borrower's insurance company and the borrower becomes obligated to the lender to repay the loan and related finance charges. Before the first loan payment is due, the lender will send the borrower a payment coupon book.
Payment of the first monthly installment constitutes acceptance of the contract -- so be sure you understand the terms and conditions of the contract before you make your first payment. Prior to this first payment, most premium finance companies will allow the borrower to rescind the contract by paying off the entire loan amount owed, minus the interest charged.
Your loan payment book should arrive within a few weeks after you have completed the finance agreement. If it does not, contact your agent or broker promptly. If you do have the premium finance company's telephone number you may contact them, also. If you receive a loan payment book and did not know that the agent or broker had signed you up for a loan, notify the lender and agent in writing that you never authorized a loan. In the letter, ask for a full refund of all interest and other loan charges. Of course you will have to pay in full for your insurance if you cancel the loan.
The loan and related charges are usually repaid to the lender in 4, 8 or 9 monthly installments, with the first payment due 30 days after the effective date of the insurance policy. These payments include both the price of the insurance and the lender's finance charges.
Be informed! Don't wait until you have a problem to ask questions. If you don't understand something, ask the agent or the lender.
What happens if the policy is cancelled?
An insurance policy may be cancelled by the insured, the
insurance company (in certain circumstances) or the lender (for
non-payment of premium).
If you don't pay on time, the lender can cancel your loan agreement and charge you a cancellation fee.
If the insured wishes to cancel the policy, he or she must contact the insurance company. The insurance company then forwards the unearned premium (refund) to the lender. The cancellation date of the insurance policy is usually the date you told the insurance company to cancel your policy. The cancellation date of the loan of premium financing is the date the monies are received from the insurer, not when the insured notifies the insurance company, since the unearned premium is the lender's collateral.
When the lender receives the refund of unearned premium from the insurance company and/or the broker, the money is also used to pay off any outstanding loan balance. If the insurance company or broker have not refunded the unearned premium to the lender, you are still responsible for the balance owed on the account. When all calculations are made, the refund, if any, is returned to the agent or broker, who then may or may not forwards it to the borrower. If there is any money due the broker for any other policy or fee, the broker may retain the refund to offset the balance owed to him by you.
If a premium financed policy is cancelled before the policy expires, the borrower usually pays a higher daily rate than if the policy had remained in force for the entire term.
This is due to the Rule of 78, a standard financing industry procedure, which allows higher interest to be charged at the beginning of a loan repayment period. Lenders will often combine this refund procedure with other fees, such as cancellation fees, late payment charges and non-refundable loan fees. As a result the return premium (refund) from the lender is often substantially less than anticipated by the borrower. Because of the way refunds are calculated, premium financing can be very expensive if you keep the loan or insurance for a short time.
Why did the lender bill me for premium owed after the
policy was cancelled?
The lender will bill you for premium owed if there is an
insufficient amount available in the unearned returned premium
from the insurer to cover all fees and charges.
What can be done if the return premium refund seems
too small?
Write directly to the lender and request a statement of
your account indicating all payments, charges, fees, earned and
unearned premium amounts. You can ask your insurance agent/broker
to obtain this information from the lender. If there are still
discrepancies in what you feel you are entitled to and what the
lender has charged contact one of the agencies listed below for
assistance.
Will a policy be reinstated if payment is made to the
lender after the policy has been cancelled?
The decision to reinstate an insurance policy can only be
made by the insurance company. Usually, policies are not
reinstated once a late payment is made. The lender can request
reinstatement of the policy, but the insurer has final say. It's
important to note that insurance coverage stops on the expiration
date shown on the cancellation notice. Coverage does not begin
again until a notice of reinstatement is issued by the insurer.
Must there be notification of cancellation for
non-payment of premium?
Yes. If the lender is a bank, it must mail notice of
cancellation to the policyholder five days before it cancels
insurance for non-payment of premium. If the lender is an
insurance company or a lender other than a bank, 10 days advance
notice is required. This means that by the time you receive a
notice in the mail, the lender may be about to cancel your
insurance. Call the lender right away to arrange for payment and
to avoid cancellation of your insurance. If proper notice is not
mailed, contact the Department of Insurance for assistance below.
Where can I get more information or assistance?
With questions involving your premium finance contract,
call or write directly to the lender or agent involved. If you
still need help, consult one of the following agencies:
General questions involving lenders other than banks (most premium finance companies):
California Department of Corporations
Financial Services Division
3700 Wilshire Blvd. Suite 600
Los Angeles, CA 90010
1-800-347-6995
For general questions involving state bank lenders:
State Banking Department
801 K Street, Suite 1009
Sacramento, CA 95814
Attn: Consumer Assistance
1-800-622-0620
For general questions involving national bank lenders (for example, the bank's name includes the letters "N.A." or word "national"):
Office of the Comptroller of Currency
50 Fremont Street, Suite 3900
San Francisco, CA 94105-2292
(415) 545-5900
For general questions involving federally chartered institutions (the phrase "federally chartered" follows the name):
Office of Thrift Supervision
Attn: Compliance Department
P.O. Box 7165
San Francisco, CA 94120
Concerning insurance company lenders, policy cancellation notification, or insurance agent or broker practices, write the Department of Insurance or call the statewide toll-free hotline, 1-800-927-HELP:
California Department of Insurance
Consumer Services Division
300 South Spring Street
Los Angeles, CA 90013
With questions regarding the Federal Truth in Lending Act (TILA):
Federal Deposit Insurance Corporation
25 Ecker Street, #2300
San Francisco, CA 94105
(415) 546-0160
While in the agent/broker's office, when applying for an insurance policy that will not be totally paid prior to policy issuance, always request the following information:
Although the California Insurance Code permits agents and brokers to sign the finance agreement on behalf of the insured in some circumstances, do it yourself, and only after you understand all terms of the contract!
Cancellations