Insurance premium financing FAQs: What is it and how does it work? BimaPay CEO answers

Insurance premium financing is gaining traction with many fintech startups venturing into this space. Premium financing works by enabling policyholders to pay their insurance premiums in smaller, manageable installments rather than a single upfront amount.

The premium financing process is facilitated through tie-ups with multiple lenders and partnerships with established insurance companies across India. Once a customer opts for financing, the lender directly pays the premium to the insurer, and the customer repays the lender in EMIs.

However, like all loan products, there are both pros and cons of premium financing.

In an email interaction, Hanut Mehta, CEO and co-founder of BimaPay Finsure, answered multiple frequently asked questions (FAQs) around premium financing, including the pros and cons. The following are the edited excerpts from the interaction that you should know.

Premium financing works by enabling policyholders to pay their insurance premiums in smaller, manageable installments rather than a single upfront amount. The process is facilitated through tie-ups with multiple lenders and partnerships with established insurance companies across India.

Once a customer opts for financing, the lender directly pays the premium to the insurer, and the customer repays the lender in EMIs.

All transactions are conducted under RBI-regulated digital lending norms, and insurance partners are IRDAI-regulated, ensuring compliance, security, and transparency. The interest rates for premium financing typically range between 18% and 20% annually on a reducing balance basis, meaning interest is charged only on the outstanding principal and decreases with each repayment.

Additional charges, such as processing fees or GST on the interest component, may apply depending on the lender’s terms.

Policyholders facing sizable, lump-sum insurance premiums, especially for health or life coverage, may benefit most from premium financing. This includes individuals who want comprehensive family or long-term plans but hesitate due to upfront cost constraints.

It’s particularly relevant for those with irregular or tight cash flows, such as gig economy workers or small business owners, who may struggle with large, one-off payouts. Financing smooths cash flow, letting them access adequate coverage without sacrificing other financial priorities.

For corporate buyers or HNIs facing large group policy premiums, premium financing can transform an otherwise prohibitive cost into manageable EMIs, aiding budgeting and planning.

Those who can comfortably pay premiums upfront or who prefer avoiding interest costs, might want to skip financing altogether. The decision hinges on balancing immediate liquidity needs, the cost of interest, and the value of uninterrupted insurance protection.

At BimaPay, the average loan ticket size stands at around ₹52,000, and total disbursements in FY25 have already crossed ₹500 crore. Overall, more than 3 lakh customers have benefited from this model, using financing to make their coverage more affordable. BimaPay currently finances over 12,000 new policies every month during non-peak periods, rising to 20,000+ policies in peak insurance months.

Premium financing helps individuals and businesses smooth out cash flow by spreading large insurance premiums into EMIs, rather than paying upfront. It enables access to better or more comprehensive coverage like higher family health plans without straining monthly budgets.

For individuals, it means avoiding lapses caused by liquidity crunches, thereby preventing penalties or costly reissuance.

For businesses, it preserves working capital, especially among MSMEs by converting large group policy payments into structured installments.

Additionally, the insured policy itself often acts as collateral, creating alignment: missed EMIs may lead to policy cancellation, encouraging timely repayment. Overall, financing empowers better protection, greater coverage, and improved financial flexibility for both retail and corporate buyers.

Premium financing fits policies with high upfront costs or long-term commitments: notably health insurance (especially family or multi-year plans), life insurance, and corporate group covers such as group health, fire, and personal accident policies.

Health insurance has seen rapid premium inflation, making EMIs attractive for individual or family plans.

For corporates, group insurance for employees often involves substantial outlays; financing transforms these into budget-friendly installments.

Life insurance financing, especially via loans against surrender value, is emerging, offering liquidity options against existing policies. In essence, premiums that strain affordability whether personal or organisational are primary candidates for financing.

However, there are important trade-offs to consider.

Another drawback is that some financing arrangements may lack complete transparency about charges, which can lead to unexpected costs.

Therefore, while premium financing can be an effective tool for managing large premium outlays, policyholders should weigh the benefits of improved affordability and uninterrupted coverage against the increased overall cost and the responsibility of timely repayment.

While premium financing can make large insurance payments more manageable, policyholders should be aware of certain costs that are not always obvious at first glance. These can include processing fees, administrative charges, or GST on the interest component, which may not be highlighted prominently during sign-up.

Even “no-cost EMI” arrangements may carry indirect costs such as conversion fees or the loss of potential discounts for upfront payment.

Over time, the interest paid on financed premiums can make the overall cost significantly higher than paying in one lump sum, particularly for longer tenure plans.

Another potential issue is that if a policy lapses due to missed installments, reinstating coverage could involve additional costs, stricter underwriting, or higher premiums. For savings-linked life insurance plans, financing can also reduce the net benefit because part of the policy value goes toward paying interest.

To avoid surprises, policyholders should request a complete cost breakdown before committing, ensuring they understand both the direct and indirect expenses involved.

Premium financing is increasingly accessible to individuals without a traditional credit history, thanks to alternative lending models and the use of the policy itself as security. Many providers now assess eligibility using digital verification, transaction patterns, or repayment history from other services, which opens the door for first-time borrowers and those in informal sectors.

However, the interest rate offered still depends on the perceived risk profile of the borrower. Those with limited or poor credit records may be charged higher rates compared to borrowers with strong credit histories, as lenders price the loan to account for potential repayment risk.

While the policy acting as collateral reduces risk for the financier, it does not entirely eliminate it, so creditworthiness remains a factor. Borrowers in this category should be especially mindful of repayment schedules, as missed EMIs can lead to loss of coverage and further harm their credit standing.

The use of premium financing for life insurance among high-net-worth individuals (HNIs) and business owners is gradually increasing, though it remains a smaller segment compared to retail health insurance financing.

For many HNIs, premium financing allows them to secure large life insurance covers without tying up substantial capital upfront, preserving liquidity for investments or business operations.

Business owners, particularly those seeking key person insurance or succession planning coverage, also see value in spreading the cost over time. While retail customers have traditionally been the primary adopters of premium financing, the gradual entry of HNIs and business clients indicates a shift toward more strategic use of this tool.

The trend is still developing, but as awareness grows and financing terms become more competitive, this segment is expected to account for a larger share of premium financing activity in the coming years.

Over the next three to five years, premium financing is likely to become a more mainstream part of the insurance landscape in India. As digital adoption grows, financing options will increasingly be integrated directly into the policy purchase journey, making EMIs a default consideration rather than an afterthought. This will be especially impactful in Tier 2 and Tier 3 markets, where affordability remains a significant barrier to insurance adoption.

Corporate premium financing is expected to expand, providing businesses with more flexible payment solutions for employee benefits and large commercial policies. There may also be growth in financing for high-value life insurance, particularly as more financial planners and advisors incorporate it into wealth management strategies.

At the same time, regulations around consumer protection in fintech lending are likely to evolve, which could standardize practices and increase transparency. Overall, premium financing has the potential to significantly boost insurance penetration, retention, and accessibility, provided it is offered with clear terms and responsible lending practices.