Premium Finance

Example

“The manufacturing company used premium finance to pay their $50,000 annual workers' compensation premium in monthly installments rather than one lump sum.”

Memory Tip

Think 'Premium Finance' as 'Pay Premium with Finance' - you're financing your insurance payments like a loan.

Why It Matters

Premium finance helps businesses manage cash flow by avoiding large upfront insurance payments that could strain working capital. It's particularly valuable for companies with seasonal revenue or those investing heavily in growth, allowing them to maintain necessary insurance coverage while preserving cash for operations.

Common Misconception

Many people think premium finance is the same as paying premiums in installments directly to the insurance company. However, premium finance involves a separate lending company that charges interest, making it more expensive than direct installment payments but providing greater flexibility and cash flow benefits.

In Practice

A restaurant owner needs $24,000 annually for comprehensive business insurance. Instead of paying upfront, they arrange premium finance with 8% annual interest. They pay the finance company $2,100 monthly for 12 months, totaling $25,200. The extra $1,200 in interest costs less than the potential lost revenue from depleting their cash reserves during busy season.

Etymology

From Latin 'praemium' meaning reward or prize, combined with 'finance' from Old French meaning to settle a debt, first used in insurance contexts in the early 20th century.

Common Misspellings

Related Terms

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Other insurance terms you should know

See Also