With interest rates rising, insurance buyers can save money byfinancing their premiums through the specialized premium financecompanies used by insurance carriers and agents.
Consumers do not always realize that borrowing to financepremiums is least costly when done through companies and agentsbecause the insurance policy is used as collateral. Here's how:
The customer pays about 25 percent down at the time coverage isbound, and has nine monthly installments thereafter. Depending onthe finance arrangements, effective annual interest costs can be aslow as 6 percent, a real bargain today.
The cheapest place to finance premiums usually is directlythrough the insurance carrier. Many of the largest carriers havespecial automatic billing plans that charge about 6 percent interest.
For insurance placed with companies that do not have their ownpayment plans, your agent can provide financing through variousprivate companies such as AFCO. The rates charged by these firmsusually are somewhat higher than the insurance companies.' However,there are ways to reduce the interest charges. First, ask your agentto delay the "check release" date as long as possible. The longer hecan wait to get the finance company's check, the lower interest rateyou will pay. Secondly, the larger your down payment, the lower youreffective interest cost will be.
How can these companies charge so little compared to banks, andwhy are they willing to pay your premiums without any credit check?The answer is that your insurance policy is a unique form ofcollateral. The finance agreement you are required to sign grantsthe finance company the irrevocable right to cancel your coverage ifyou do not make your payments on time.
Since the finance companies require a 25 percent down paymentand monthly installments thereafter, there is never any economic lossto the finance company as long as they cancel coverage promptlywhenever an installment payment is not made. Because there is littlerisk of loss, there is little reason for credit checks or highinterest rates to offset loan losses.
For businesses especially, insurance premium financing can be alow-cost source of borrowing that frees other assets to be used forbusiness promotion.
INSURANCE STOCKS?
"Are insurance stocks a good investment?" a reader asks.Although insurance stocks have rebounded from their October, 1987,lows, many are still selling below their best levels in the pastyear. In fact, the prices of some of the major insurers, such asAetna and CIGNA, are low enough to generate dividend yields of around6 percent.
Insurance stocks historically have not been among the stockmarket's strongest performers. Now, there are more reasons forcaution than for a buying spree.
In the property and casualty insurance business, for example, thecompetitive market has returned, bringing with it fears of erosion ininsurer profitability and even economic stability. For stockcompanies, this has meant selling more shares, which tends to diluteshareholder value. Low confidence also tends to lower share prices.
The life and health insurance marketplaces, by contrast, are inan upward pricing spiral that is equally worrisome. Fears about theultimate cost of AIDS claims for life and health insurers is causinga great deal of market gyrating.
At the same time, health insurance prices, driven by increasedcosts and utilization, are rising so sharply that no one is sure whatwill happen to the market. The uncertainty over national healthinsurance policy further complicates the picture.
LENDING YOUR CAR
"Am I covered if I lend my car to a friend?" This is one of themost frequently asked questions I receive.
The answer is yes. Any licensed driver who operates your carwith your permission is covered by your policy. In fact, this meansthat in the event of an accident, your insurer will pay to repair thecar and will pay any negligence claims against you as a result of theaccident.
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