What is a premium finance agreement?
A premium finance agreement (PFA) is a loan. It is not an insurance product, not issued by your carrier, and not part of the policy. It is a separate financing contract between your client and a licensed premium finance company, where the lender pays the full annual premium to the carrier upfront and your client repays in monthly installments plus a finance charge.
That distinction matters because it changes how you explain it, how your client thinks about it, and what happens if something goes wrong.
The 5 key components of every PFA
1. Loan amount
Total premium minus the down payment. On a $75,000 premium with 20% down ($15,000), the loan amount is $60,000 — the principal the PFC pays to the carrier on your client's behalf.
2. Annual percentage rate (APR)
The annualized cost of the loan. For commercial lines, market rates run 10–25% APR depending on state, loan size, and risk profile. Loans use a declining balance structure, so interest accrues only on the remaining principal — not the original loan amount.
Example: A $60,000 loan at 18% APR over 10 monthly installments carries a total finance charge of approximately $2,970 and monthly payments of about $6,297. Compare that to a $75,000 upfront payment in January. For most commercial clients, the cash flow math is clear.
3. Down payment
The upfront percentage your client pays before the PFC funds the remainder. Standard range is 10–25% of total premium. A higher down payment lowers the loan amount and the monthly payment.
4. Installment schedule
Typically 9 to 11 monthly payments, timed to pay off before the policy renews. Fixed at signing — your client knows exactly what they owe and when.
5. Power of attorney for cancellation
By signing the PFA, your client grants the PFC limited authority to request cancellation of the underlying policy if they default. The PFC cannot modify coverage, change deductibles, or communicate with the carrier about anything other than cancellation. Before acting, they must send 10 days written notice to both the insured and the agent. As long as payments are current, the power of attorney never comes into play.
How to explain power of attorney to a nervous client
Use the car loan analogy. Tell your client: when you sign the finance agreement, you are giving the finance company the ability to cancel your policy if you stop making payments — similar to how a bank can repossess a car. The difference is the PFC cannot cancel overnight. They must send you and your broker written notice at least 10 days in advance. That gives you time to catch up and gives your broker time to intervene. As long as payments are current, nothing happens.
Clients understand collateral. They understand notice periods. What they do not understand is jargon — so do not lead with it.
Common client objections and scripts
Is this just a loan? Yes, and that is a feature. It is a financing arrangement exactly like financing equipment or a vehicle. Same carrier, same coverage, same policy — you are just changing how you pay for it.
What happens if I miss a payment? You and your broker both receive written notice at least 10 days before anything happens to your policy. Your broker will contact you the moment they see it. The goal is to make sure that notice never turns into a cancellation.
Can they change my coverage? No. The finance company has no authority over your policy other than the ability to request cancellation if you default. They cannot change your deductibles, limits, or any other policy terms.
Can I pay it off early? Yes, with no prepayment penalty. Interest only accrues on the outstanding balance, so you save money by paying early.
What happens if a client defaults
- PFC sends 10-day written notice to insured and agent
- If default is not cured, PFC requests cancellation from carrier
- Carrier cancels policy and calculates unearned premium
- Carrier refunds unearned premium to PFC
- PFC applies refund to outstanding loan balance
- Any remaining funds are returned to the insured
- Insured is now uninsured and must find replacement coverage
A cancelled financed account creates two risks for the broker: commission chargeback exposure and damage to the client relationship. Both are avoidable. Call the client the moment you receive a default notice — most cancellations are preventable with one phone call.
How Patch structures its agreements
Fully digital end to end. You generate a quote in the Patch portal in minutes. A complete agreement is auto-generated with your client's information, loan terms, and required disclosure language. Your client signs via e-signature — no printing, no faxing. Patch funds the carrier within 24 hours of a signed agreement. Automatic payment reminders go to your client before each due date. You are notified immediately if an account falls into default, before your client is.
Ready to start offering premium financing?
Submit your agency profile and we will walk you through our agreement process, quoting platform, and terms for your states.
Frequently asked questions
What is the difference between a premium finance agreement and a carrier payment plan?
A carrier payment plan bills your client in installments directly from the insurer. A PFA is a separate loan from a third-party lender who pays the carrier in full upfront. Premium financing typically costs less than carrier installment fees, allows brokers to earn arranger fees in states that permit them, and gives brokers more control over the client relationship.
Is the PFA part of the insurance policy?
No. It is a completely separate contract. The carrier is not a party to it and it has no effect on your policy terms or coverage.
How long does it take to get funded?
With Patch, quote to funded typically takes less than 24 hours once the agreement is signed electronically.
Can a client cancel a premium finance agreement?
The client can pay off the loan early at any time without penalty. However, because the PFC has already paid the carrier, the outstanding balance is still owed. Clients considering cancelling their underlying policy should speak with their broker first to understand the financial implications.
What information is needed to generate an agreement?
Insured name and address, carrier name and policy number, total annual premium, policy effective date, and desired down payment percentage. Patch can generate a complete agreement from these five data points in minutes.
