Premium Funding
Managing a large annual insurance outlay can place pressure on business cash flow. Premium funding is a finance arrangement that allows businesses to spread the cost of their insurance premiums into regular instalments rather than paying the full amount upfront. Clear Insurance can help you access premium funding arrangements through established funding providers.
What is Premium Funding?
Premium funding is a loan arrangement in which a third-party finance provider (the premium funder) pays your insurance premiums to the insurer on your behalf. You then repay the funder in regular instalments, typically monthly, over an agreed term. The funder charges interest on the amount financed, and the total cost of your insurance will be higher than if you paid the premium upfront.
Multiple insurance policies can generally be bundled into a single funding arrangement, consolidating them into one regular payment. The funder holds a power of attorney over the funded policies, which means they may cancel those policies and apply any refund premiums to the outstanding balance if repayments are not made.
Premium funding is a separate financial product to your insurance policies. The terms and conditions of the funding arrangement are set by the funder, not by your insurer or by Clear Insurance.
How the Process Works
Quote and Application
Once your insurance renewal or new business placement is confirmed, your Clear Insurance adviser can obtain a premium funding quote from one or more funders. The quote will set out the total amount financed, the interest rate, the repayment schedule, and any applicable fees. You will need to review and sign a funding agreement before the arrangement is established.
Premium funding may free up cash flow for your business and offers flexible payments to relieve cash flow pressure. Plus, the interest charged on the premium funding may be tax deductible.
Premium Payment
Upon execution of the funding agreement, the funder pays your insurance premium or premiums directly to the insurer or insurers. This ensures your policies are in force by the required date regardless of when your first instalment falls due.
Repayments
You repay the funder in regular instalments according to the agreed schedule, typically over 10 to 12 months. Payments are usually made by direct debit. If a payment is missed or dishonoured, the funder will generally notify you and allow a short period to remedy the default before taking further action.
Things to consider
Premium funding may suit some businesses and not others. The following points are worth considering before entering into a funding arrangement.
Additional Cost
Because premium funding involves borrowing, you will pay more for your insurance overall than if you paid the premium in full at the outset. Interest and any applicable fees are charged on top of the base premium. The total additional cost will depend on the amount financed, the interest rate, and the term of the arrangement.
Interest and Fees
Funders charge interest on the outstanding balance, expressed as an annual percentage rate or flat rate depending on the provider. Some funders also charge application fees or dishonour fees. You should review the funding agreement carefully before signing to understand all costs involved.
Default and Policy Cancellation
This is an important consideration. If you default on your repayments and do not remedy the default within the funder’s notice period, the funder may cancel the funded insurance policies. This would leave your business without the relevant insurance cover, potentially at a time when a claim could arise. The funder may also apply any unearned premium refund from the cancelled policies to reduce the outstanding loan balance.
Tax Treatment
The interest and fees associated with a premium funding arrangement may be deductible as a business expense. However, tax treatment depends on your individual circumstances. You should seek advice from your accountant or tax adviser regarding the deductibility of these costs.
Impact on Borrowing Capacity
A premium funding arrangement is a credit obligation. Depending on your business’s financial structure, entering into additional credit arrangements may affect your overall borrowing position. This is worth discussing with your financial adviser if relevant to your circumstances.
Suitability
Premium funding tends to be most useful for businesses with multiple policies, large total premiums, seasonal cash flow, or a preference for predictable monthly outgoings. For businesses with smaller total premiums, the cost of interest and fees may outweigh the cash flow benefit of spreading payments. Your Clear Insurance adviser can discuss whether premium funding is likely to be worth considering in your situation.
Our Role in Premium Funding Arrangements
Clear Insurance acts as an intermediary in arranging premium funding. Our role is to obtain quotes from premium funding providers on your behalf, present those options to you, and facilitate the paperwork if you choose to proceed. We do not provide credit ourselves and are not the funding provider.
We may receive a commission from the premium funding provider as part of this arrangement. This will be disclosed to you in accordance with our obligations under our Australian Financial Services Licence (AFSL 548953). You are not obligated to use premium funding and choosing not to will not affect the quality of your insurance placement or the service we provide.
If you have questions about premium funding or would like to explore whether it suits your business, speak with your Clear Insurance adviser.
Frequently Asked Questions
What types of insurance can be premium funded?
Most commercial insurance policies can be included in a premium funding arrangement, including public liability, professional indemnity, management liability, commercial property, business interruption, and fleet or motor insurance. Some state-based compulsory schemes, such as workers compensation in certain jurisdictions, cannot be funded. Your adviser can confirm which of your policies are eligible.
Does premium funding affect my insurance cover?
Your insurance policies remain in force as normal provided repayments are maintained. The funder holds a power of attorney over the funded policies, which allows them to cancel cover if you default on repayments. As long as payments are up to date, your cover is not affected by the funding arrangement.
What happens if I need to cancel a policy mid-term?
If a funded policy is cancelled before the end of its term, the insurer will generally return the unearned portion of the premium to the funder. The funder will apply this amount to reduce your outstanding loan balance. Depending on the timing and the amount of the refund, there may be a remaining balance to pay or the refund may extinguish the debt. The specific process is set out in your funding agreement.
Is premium funding available to all businesses?
Most businesses with an active insurance programme can apply for premium funding. Funders assess applications based on factors including the business’s credit history, the total premium amount, and the types of policies being funded. Approval is at the discretion of the funding provider.
How is premium funding different from paying by credit card or using an overdraft?
Premium funding is a dedicated finance product designed specifically for insurance premiums. It typically offers a fixed repayment schedule, a set term aligned to your policy period, and a straightforward application process. Whether it is more or less cost-effective than other financing options will depend on the interest rates and fees involved in each case. Your financial adviser or accountant can help you compare the options.
Will using premium funding affect my relationship with my insurer?
No. From the insurer’s perspective, the premium has been paid in full by the funder. Your policy terms, renewal process, and claims handling are not affected by whether you used premium funding to finance the premium payment.
