The insurance finance, or premium finance, industry provides policyholders (insured) with the option of paying monthly rather than annually for their insurance through a loan or finance agreement. Insured may choose to finance their premiums when there are no convenient payment plans provided by the insurance carrier. Insured electing to finance their insurance premiums agree to an installment loan with a third party: a premium finance company like UPAC. Financing insurance premiums is similar to paying for furniture, appliances, jewelry or even automobiles over time. In these cases, a consumer finance company generally pays the retailer and the buyer makes payments to the finance company. With insurance premium financing, the insurance policy is the collateral for the loan, similar to consumer finance where the item purchased is the collateral for the loan.

Upon accepting a finance contract with the insured, the premium finance company pays to the insurance carrier the rest of the premium over and above the amount of the down payment paid by the insured. The premium finance company may pay the insurance carrier directly or indirectly by paying their designee such as the insurance agency or broker. The proceeds of the loan are not released directly to the insured (which is similar to the consumer finance examples above or even a home mortgage example). A typical premium finance contract has a fixed rate of interest and a predetermined number of installments (frequently 9 monthly installments).

Because the premium finance contract is an installment loan, the interest is precomputed and the insured is given a monthly payment amount which includes the principal and interest. Paying off the loan early may provide an interest rebate to the insured. Cancelling the insurance does not change the insured's obligation under the loan or premium finance contract. The insurance carrier will refund the unearned premiums to the premium finance company, but if the refunded premium amount does not sufficiently cover the remaining loan balance, the insured remains liable for the balance. Again, this is similar to other forms of financing. If a car that is financed is sold, the proceeds from the sale of the car may pay off the loan completely, but if not the previous owner is still responsible for any balance on the loan.

Loans to pay for insurance premiums, or insurance finance contracts, are entered into by signing a Premium Finance Agreement (PFA), which is typically presented to the insured by their insurance agency along with a quote for insurance coverage. In some states, the insurance agency may sign the PFA on behalf of the insured thereby setting up the insured on money payments through a finance company without the insured's direct signature on a PFA. The PFA, or loan, must then be approved by the premium finance company.

PFA's are standard forms that are typically approved by each state's Department of Insurance or Department of Banking. States generally license premium finance companies and regulate premium financing with statutes or regulations that must be followed to maintain licenses. The PFA form indicates the terms and conditions which outline the responsibilities of the insured, the insurance agency and the premium finance company. It lists all the insurance policies covered and specifies the down payment, finance charges, penalties, and other terms of the loan. The PFA is a promissory note documenting an installment loan. It includes an assignment of a limited power of attorney from the insured to the premium finance company to stand in the insured's place to have the right to cancel the insurance policy in the event of default on the loan.

Through the PFA, insured also assign rights to the unearned premium held by the insurance carrier to the premium finance company. This unearned premium is the collateral on the loan. If payment on any installment is delinquent the premium finance company is authorized, after giving the required notice, to request cancellation of the insurance policy(ies) and collect the remaining unearned premiums from the insurance carrier. In the event of a shortfall, the insured is held responsible. A PFA evidences a loan from the finance company to the insured that must be repaid regardless of what occurs involving the insurance policy(ies).

The insured will receive coupons from the premium finance company and (usually monthly) payments are then made by the insured to the premium finance company. The premium finance company will notify the insured when they are delinquent on an installment by sending a late notice known as a Notice of Intent to Cancel. These notices are sent after the account has accrued the statutory late charges and is past due (usually 5 days) depending on state regulatory requirements. If the default is cured and money is received by the premium finance company timely the account is now current and cancellation is not requested. However, if the default is not cured and sufficient money is not received within a pre-determined number of days which varies by state (usually 23 days from original due date) by the premium finance company to cover the installment, the premium finance company requests the policy(ies) listed as collateral for the PFA be cancelled by sending a Notice of Cancellation. This notice is usually sent to the insurance carrier, the insurance agency and the insured.

If the insured cures the default by paying sufficient money to the premium finance company to bring the account current, the premium finance company may (but is not required to) request reinstatement of the insurance coverage. However, even if the premium finance company requests reinstatement of the insurance coverage there is no guarantee the insurance carrier will actually reinstate the insurance coverage. The insurance carrier may deny the reinstatement request.

If insurance coverage is changed, the original insurance policy is endorsed, or modified. Positive endorsements add coverage and negative endorsements reduce coverage. Examples include adding or dropping a truck from coverage for a fleet of trucks. For positive endorsements, the original PFA may be adjusted to reflect the change in the insurance policy and the related insurance premium less a down payment for a portion of the additional insurance coverage. New coupons are sent to reflect the amended PFA and the new monthly payment amount. For negative endorsements, or insurance coverage / premium reductions, insurance carriers refund a portion of the insurance premium to the premium finance company which applies that refund to the loan balance and monthly payments may be effected or for smaller negative endorsements the loan just pays off sooner.

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