The penetration in India is extremely low compared to other developed countries. IRDAI data showed that India’s insurance penetration was 4.2% of the GDP in 2021-22. While the data has been positive in the last few years, there is still a long way to go.
The data indicates that many people don’t have insurance coverage. One innovative solution to help people get adequate insurance coverage is insurance premium financing.
Premium financing involves using loans to cover the cost of insurance premiums. This helps to pay premiums over a more extended period instead of paying in one go.
“Several insurance companies have forged partnerships with premium financers to offer this service to their policyholders. At BimaPay, we follow a similar approach by collaborating with insurance companies, making it convenient for policyholders to opt for insurance premium financing during their onboarding experience,” said Hanut Mehta, Co-Founder and CEO, BimaPay.
What is insurance premium financing?
Insurance premium financing is a process where a borrower secures a loan from a third-party provider to cover the insurance policy’s premiums. This arrangement is similar to standard loans, where the borrower (the insured person) makes the interest payment till the loan is fully paid off.
This financing option will be helpful, especially for paying health insurance premiums, as healthcare expenses are growing faster.
Benefits of premium financing
Insurance premium financing offers several benefits, which can be explained in simple terms as follows:
Makes insurance more affordable: Paying the entire premium at once can be challenging for many people. Premium financing allows people to distribute their insurance premium payments over time, reducing their financial burden. This makes insurance affordable for individuals for their personal and business needs.
“Insurance premium financing enables new customers to buy insurance in the first place and those who already have insurance, it helps in buying insurance adequately. In India, most customers don’t budget for insurance, which results in either the customers don’t buy insurance, or they buy the bare minimum products. Both of which lead to a very negative experience at the time of claims. Insurance premiums, especially health insurance, are constantly on the rise, premium financing helps in improved retention in such cases as well,” said Prabal Khanna, Co-founder and COO, Finsall.
Amol Joshi, Founder, PlanRupee Investment Services, says that insurance premium financing helps policyholders continue their policies during a cash crunch.
“The biggest benefit is being able to carry on with a policy when you are suffering a cash crunch. If a policy lapses, the revival has its own challenges, including penalties. Also, a fresh policy would cost more due to advancement in age. Premium financing helps avoid these situations,” said Amol.
Increases insurance coverage: In addition to making insurance affordable, insurance premium financing helps individuals to opt for adequate insurance coverage. This ensures that they have better protection for themselves and their assets.
Improves cash flow management: With premium financing, borrowers can better manage their cash flow. Instead of allocating a large sum to insurance premiums simultaneously, they can spread out the expense, keeping more cash on hand for other needs.
Frees up funds for other investments: As individuals don’t have to pay the insurance premium in one go, they can use the fund for other purposes, such as towards their business activities, which might give them a higher return.
Helps businesses to obtain multiple insurance policies: Businesses are prone to several risks. So, an organisation might have to get several types of insurance policies to protect the different types of risks. In this case, businesses can take advantage of premium financing to get multiple insurance plans. This approach helps in comprehensive risk management easily.
Interest rates associated with premium financing
The interest rate associated with premium financing will depend on a lot of different factors, such as premium amount, nature of policy, and overall interest rate trajectory in the economy.
“Interest rates are typically low as compared to other unsecured loans because the customer is taking a loan to become financially more stable and the insurance industry is very price sensitive. Even the term/tenure of premium financing products is smaller as most insurance products are themselves less than a year in duration. However, as the premium financing market is still in its nascent stage in India there is a lot of room for evolution,” said Prabal.
In addition to interest rates, there might be administrative fees for setting up and managing the arrangement.
Savings to fund insurance premium
“It is always better to plan for your premium well in advance to avoid this loan situation altogether. Accumulate premium amount equivalent money via recurring deposit or mutual fund Systematic Investment Plan in liquid or ultra short term funds,” said Amol.
Personal loan vs insurance premium financing
If we compare personal loans and insurance premium financing, premium financing might be a better option than personal loans.
“Typically, the interest rates for insurance premium financing range from 8% to 15%. In contrast, personal loans are available with interest rates spanning from 15% to 24%, and they can be utilised for various purposes, including financing insurance policies,” said Hanut.
“Choosing insurance premium financing over a personal loan offers a streamlined process. With personal loans, individuals must apply, gain approval, and then access the funds after it is deposited into their bank accounts. However, when opting for insurance premium financing, the financing component seamlessly integrates into the insurance application process. Borrowers have the flexibility to select their preferred payment options and initiate their policy without the need to engage with additional financial institutions. This simplicity and convenience make insurance premium financing an attractive choice for policyholders seeking financial flexibility and security,” he added.
Disadvantages
While there are many positives associated with insurance premium financing, customers should also be aware of a few aspects.
Reduce the overall benefit from the insurance plan: It is essential to note the outgo regarding loan interest. Amol says that the outgo in terms of loan interest might reduce the overall returns from the policy.
Policy getting lapsed: The insurance policies of the customers who cannot pay their EMI might lapse.
“For a customer who doesn’t pay their EMI might end up losing their cover and any amount that they have paid already,” said Prabal.
Negative impact on credit scores: Like any regular loan, failing to meet premium payments EMIs could adversely affect one’s credit score. This might hamper future loan requirements.
Hanut believes that there is a positive side to it as well. “The negative impact on the credit score serves as a strong motivator for policyholders to honour their financial obligations in a timely manner while also ensuring they maintain their insurance coverage,” said Hanut.
In conclusion, a formal Memorandum of Understanding (MoU) from the Insurance Regulatory and Development Authority of India (IRDAI) is awaited. Insurance premium financing is an innovative solution to help policyholders take adequate insurance and pay premiums without disturbing their cash flow. However, it is also essential to pay the interest on time to continue getting the insurance cover. Talk to your financial advisor before taking insurance premium financing.
Padmaja Choudhury is a freelance financial content writer. With around six years of total experience, mutual funds and personal finance are her focus areas.
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