(Revised September 2002)
Introduction
What Is Premium Financing?
Should I Finance My Insurance Premium?
How Does Premium Financing Work?
What Happens If You Want to Payoff the Loan Early?
What Happens If the Policy Is Canceled?
Why Did the Lender Bill Me for Premiums Owed After the Policy Was Canceled?
What Can Be Done If the Return Premium Refund Seems Too Small?
Will a Policy Be Reinstated If Payment Is Made to the Lender After the Policy Has Been Canceled?
Is Notification of Cancellation for Nonpayment of Premium Required?
Where Can I Get More Information or Assistance?
Resources
Insurance can be a very wise purchase, but it can also be expensive. Out of convenience or economic necessity, many Californians finance their insurance premium. However, taking out credit costs money, and credit should be used with care and sound budgetary planning. Before you decide to finance an insurance policy, you should understand how the process works. It is also important to compare costs, just as you would with any cash purchase. Even slight differences in the terms of the premium financing agreement can make a big difference to your financial bottom line.
The California Department of Insurance (CDI) has prepared this consumer guide to explain how premium financing works, what to look for in a premium finance contract, and tips on what to do if a problem arises. Some of the most frequently asked questions on premium financing are discussed below.
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When you finance an insurance premium, you enter into a contract with a lender to obtain a loan. You make a down payment, and the lender agrees to pay the insurance company the balance of the premium. You agree to repay the lender in installments for the amount of the loan (principal) and interest and any applicable fees.
Premium financing is not an insurance policy; it is 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 to finance the premium 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 will be expected to repay the loan even if you have a dispute about your insurance with the insurance company or the broker.
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Financing an insurance premium, like financing any consumer purchase, is an individual decision based upon economic considerations. For some, premium financing is a convenient way to pay for insurance. For others who simply do not have the means to pay in full at time of purchase, premium financing is a necessity.
Premium financing can be expensive. Before you sign a contract, you should explore other less costly options. Your agent or broker is required to disclose the premium payment 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. Some insurers may provide their own financing, allowing you to pay in installments for a small fee. Interest rates may be lower for this type of loan, or may not apply at all. If you have policies through the California Automobile Assigned Risk Plan (CAARP), you can pay the insurer in installments at no interest after an initial down payment has been made.
Before you agree to finance your premium, ask what interest rate and related charges you will be paying. The federal Truth in Lending Act (TILA) and the California Insurance Code (CIC) 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. It allows for comparison of loan interest rates.
A premium financing agreement may also include the financing of a broker fee. This is a charge 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 complete information. He/she 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. For more information regarding broker fee and Broker Fee Regulations, contact the CDI and ask for the brochure entitled "Dealing with a Broker-Agent." (See the "Talk to Us" section of this brochure.)
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When an insurance company finances a premium "in-house," payment plans are set up allowing the insured to pay the premium in installments over a specified period. Interest or per-installment fees are charged. If the insurance company does not have its own installment plan, the insurance agent or broker selling the policy can arrange for a premium financing agreement through a lending institution or bank.
A premium finance agreement should include the following information:
- The name of bank or premium finance company lending the money
- Insured's (borrower's) name, address, and phone number
- Loan number
- Listing of insurance policies assigned to the loan agreement (In some cases, you may finance more than one insurance premium in a premium finance agreement.)
- Disclosure Statement indicating
- The amount financed
- The dollar amount of finance charges
- The annual percentage rate
- The total number of payments
- The amount of late payment charges
- The amount of each monthly payment
Some brokers will ask if you want financing and then proceed to complete and sign a finance agreement for you. This can only be done if the broker has been given your permission through a signed agreement, usually in the form of a broker agreement. The agreement gives the broker power-of-attorney to sign any documents on your behalf relating to the purchase of insurance. In deciding whether to follow a broker's recommendation on premium financing, keep in mind that the broker often receives a fee from the lender for each loan written.
Do not let a broker or agent sign your name to a contract unless there is no better choice available. Read the disclosure statement and decide for yourself if it is in your best interest to enter into this contract. Never let a broker or agent sign you up for a loan that you don't need. It is crucial that you read and understand all contract language especially if the agent or broker has completed the finance agreement on your behalf.
The disclosure statement contains important information on the costs and terms of the loan. Make sure you understand all provisions, including the following:
- The payment schedule
- The finance charges
- The annual percentage rate (APR)
Find out what charges could result if you don't pay on time or you want to cancel your policy, especially since your insurance company and broker/agent are responsible for returning monies to the premium finance company in a timely manner.
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. If your loan payment book does not arrive within a few weeks after you have completed the finance agreement, contact your agent or broker promptly. If you have the premium finance company's telephone number, contact them. If you receive a loan payment book and did not sign up for a loan, or the terms and conditions do not agree with your disclosure statement, notify the lender and the broker/agent in writing. In the letter, request a full refund of all interest and other loan charges if you did not authorize the loan. If the terms and conditions are incorrect, ask that they be corrected to agree with your disclosure statements. Please note you will have to pay in full for your insurance if you cancel a premium finance agreement.
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 broker/agent or the lender or both.
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Some lenders impose a fee if you pay off the loan in advance. Some require that part of the finance charge is "earned" by the lender on approval of the loan. This means that if you change your mind about the insurance, the lender gets to keep the entire "earned on approval" fee.
Payment of the first monthly installment constitutes acceptance of the contract. 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 interest.
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An insurance policy may be canceled by the insured, the insurance company (in certain circumstances), or the lender (for nonpayment of premium).
If you don't pay on time, the lender can cancel your loan agreement and charge you a cancellation fee. If you wish to cancel the policy, you 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 informed the insurance company to cancel your policy. The cancellation date of the loan is the date the monies are received from the insurer, not when you notify the insurance company. Any 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 payoff any outstanding loan balance. If the insurance company or broker has 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 may or may not forward 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/her by you.
If a premium financed policy is canceled 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 Rule 78, a standard financing industry procedure that allows a higher interest rate 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 expensive.
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The lender will bill you for premium owed if there is an insufficient amount available from the unearned premium the insurer returns to cover all loan fees and charges.
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If you believe the return premium refund that you have received is too small, you can write directly to the lender and request a statement of your account, including all payments, charges, fees, earned, and unearned premium amounts if you feel the return premium is incorrect. You can ask your insurance agent/broker to obtain this information from the lender. If there are still discrepancies, contact the appropriate agency listed in this brochure for further information and assistance.
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The decision to reinstate an insurance policy can only be made by the insurance company. Often, policies are not reinstated even if a late payment is made. The lender can request reinstatement of the policy, but the insurer has the final say. Insurance coverage stops on the expiration date shown on the cancellation notice. Coverage does not begin until the insurer issues a notice of reinstatement.
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In order to cancel a policy for nonpayment of premium, the proper notice must be given. If the lender is a bank, it must mail notice of cancellation to the policyholder five days before it cancels insurance for nonpayment 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 notice in the mail, the lender may be about to cancel your insurance. Call the lender right away to arrange for payment to avoid cancellation of your insurance. If you do not receive proper notice of cancellation, contact the CDI for assistance.
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If you have questions involving a premium finance contract, call or write directly to the lender or broker/agent involved. If you need assistance regarding policy cancellation notifications, or insurance agent or broker practices, contact the CDI by using the information in the "Talk to Us" section of this brochure.
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California Department of Corporations
Financial Services Division
320 W. 4th, Suite 750
Los Angeles, CA 90013-1105
Phone: (213) 576-7500
(866) 275-2677
Web Site: www.corp.ca.gov
For general questions involving lenders other than banks (most premium finance companies).
Department of Financial Institutions
1810 13th Street
Sacramento, CA 95814
Phone: (916) 322-5966
(800) 622-0620
Web Site: www.dfi.ca.gov
For general questions involving state banks.
Office of the Comptroller of Currency
Customer Assistance Group
1301 McKinney Street, Suite 3710
Houston, TX 77010
Phone: (800) 613-6743
Web Site: www.occ.treas.gov
For general questions involving national banks.
Office of Thrift Supervision
Office of Consumer Programs
1700 G Street, NW
Washington, DC 20552
Phone: (202) 906-6237
(800) 842-6929
Web Site: www.ots.treas.gov
For general questions involving federal savings and loans and federally chartered savings banks.
Federal Deposit Insurance Corporation
Division of Compliance and Consumer Affairs
550 17th Street, NW
Washington, DC 20429
Phone: (202) 942-3100
(800) 934-3342
Web Site: www.fdic.gov
For general questions regarding federally insured state banks that are not members of the Federal Reserve System.
Federal Reserve Board
Division of Consumer and Community Affairs
Washington, DC 20551
Phone: (202) 452-3946
Web Site: www.federalreserve.gov
For general questions regarding state banks that are members of the Federal Reserve system and regulation of the federal Truth in Lending Act (TILA).
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