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Glossary of Premium Finance Terms

An additional Glossary of Terms is available.


A representative appointed by an insurance company to solicit, negotiate, and enter into contracts with consumers on its behalf.
The legal intermediary between the insurer and the insured.

Annual Percentage Rate (APR)

The cost of credit computed as a percentage at a yearly rate. Use the APR to compare the cost of different types of credit.


A person who represents and acts on behalf of the insured. A broker may also be an agent of the insurer for such purposes as policy delivery or collection of premium.


Termination of the insurance contract. Cancellation may be requested by the insurer (in certain circumstances) the insured, or by a lender for nonpayment of premium if the policy is premium financed.


What a lender accepts as security for a loan.


A legally binding agreement between two or more parties.

Disclosure Statement

The section of the finance agreement which illustrates the total premium, fees, amount financed, finance charge, annual percentage rate, total of payments and amount of each payment.

Effective Date

The date shown on a policy or binder when insurance coverage begins.

Insurance Policy

The contract between insurer and insured containing information regarding the risk, policyholder, contractual conditions and
rate assessed.

Insurance Premium

Cost of insurance coverage assessed by the insurer to the insured for coverage for a specified period.


A financial institution that loans money, such as a bank, premium finance or insurance company.


A sum of money which is lent for a specified period of time, and repayable with interest and fees.

Payment Options Disclosure Form

A written statement required of the agent or broker that informs the insured of his right to be given information on all the options available for the payment of the premium. The statement must be signed by the insured indicating the insured has been given enough information to make an informed choice.

Premium Finance

A process where a lender pays an insurance premium to an insurer on behalf of an insured. The policyholder repays the lender for the amount of the loan (principal) plus interest and any assessable fees and charges. Process is initiated at the agent/broker's office when the coverage is originally applied for and the down payment is made.


Cancellation of any contract as of the effective date. When a premium finance contract is rescinded, coverage is cancelled and all monies are returned. This may occur when misrepresentations are made to the insurance company regarding the insured or the insured's coverage.

Rule of 78

A method of figuring interest on a financed insurance premium where interest is paid first, resulting in a smaller returned premium (refund) to the insured when a finance agreement is cancelled early. This rule is not used when figuring an insurance premium refund--this must always be done based on the time coverage was in force (pro-rata).


The process used by insurance companies where risks are accepted or rejected for coverage. The process includes the proper classification of the risk so an adequate premium is charged by the insurer.

Unearned Premium

The portion of the premium which has not been used to provide coverage. This portion is returned when a policy is cancelled prior to the expiration date.

This is a list of terms provided by the California Department of Insurance. It is not meant to be all inclusive, but should help with your understanding of the premium financing documents.







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