Before discussing why some taxes and fees are financeable, and others are not, it is important to understand the different kinds of insurance-related taxes and fees that exist.
Fees can typically be categorized as “stamping fees” or “policy fees” and are fees that are being charged in addition to the policy premium to pay for the paperwork involved in writing the policy. The general agent usually charges this fee but may sometimes be charged by the insurance carrier. This fee is similar to what one might pay in conjunction with a mortgage loan, i.e., points, documentation fee, etc. Policy fees described herein are fully earned because once they are paid, there is no refund.
Taxes are usually a surplus lines tax – a tax charged by a general agent or insurance carrier when a less expensive policy is sold in a state where the carrier is writing business on a non-admitted basis.
Taxes are usually earned over the life of a policy, just like the premium. Therefore, if a policy is canceled sometime before the expiration date, the same portion of the tax is refunded along with the unearned premium. This makes the tax financeable because it becomes part of the loan collateral. For example, if a $1,000.00 policy premium accompanied by a half of one percent tax of $5.00 were financed and the policy was canceled halfway through, $500.00 of unearned premium plus $2.50 of unearned tax would be refunded by the insurance carrier.
Just because a fee is not refundable in any part does not mean it cannot be financed; it only means that no portion will be refunded. Without a refund available, some finance companies will not finance a fee. However, other finance companies will finance the fee on a case-by-case basis. Why? The answer is simple: competition.
A potential Scenario:
- Finance Company A has a customer and does not finance the fully earned policy fee on the customer’s policy.
- Finance Company B agrees to finance the policy fee in an attempt to acquire the customer from their competitor.
- Finance Company B knows that if the customer defaults on the loan, the fee will not be refunded and will have to declare it as a loss.
- Finance Company B knows this risk and is willing to take it.
- Finance Company A now faces the potential loss of their customer and may reassess their initial decision to not finance the fully earned policy fee on their customer’s policy.
It is very important to understand that while Finance Company B knows they are taking a risk by financing the policy fee, the borrower still owes that fee to the finance company even if there is a default on the loan. It stands to reason no risk is assumed since the borrower must still pay the portion of the fee that was not paid back to the finance company if there is a default. The reason finance companies assume that financing a fully earned fee is risky is because of the low probability the borrower will make good on the balance due if they default on the loan. As a result, even though the borrower owes the money, the finance company doesn’t expect the borrower to repay it.