Is insurance paid monthly or yearly?

Insurance Q&A: “Is insurance paid monthly or yearly?”

The short answer is both. Just like anything else you pay money for, the purchase and payment of an insurance policy can be completed in various ways. Even though it may seem like monthly payments are the only available option, mostly because they’re advertised more aggressively, there are actually annual options as well. The specifics are too many to detail in this post, but we’ll go over the basics to get your question answered.

Do you have a choice? 

A personal loan, most bills for any service that you have these days, and insurance policies such as auto and homeowners insurance, typically come with multiple payment options based on the length of the policy. The typical offered policy lengths could be one month, six months, or twelve months.

These include various down payment and installment options, as well as paying the whole darn thing in full, which is what the insurance company prefers but may be too much money for someone to pay all at once. Sometimes a company will attempt to make this the more enticing offer by making the annual cost less than what you’d pay monthly. Because who could say no to a lower annual premium, right?

For health insurance, you typically pay a monthly premium, while auto and other lines can be paid monthly, bi-annually, or once a year.

When your policy is being issued, you’ll be asked by your insurance company is how you want to make the down payment and pay the installments, assuming you don’t pay in full. Every company is different, but most do it this way. Monthly payments are usually easier for a consumer, since funds are usually paid out either weekly or bi-weekly.

The down payment and installment plans vary by the type of insurer you are purchasing coverage from and the ‘line’ of coverage that you are adding (personal or commercial insurance). The average rate of commercial coverage is going to be much higher than that of a personal type of policy.

If you are dealing with the top, standard insurers, you’ll likely get more options. On the other hand, if you are seeking non-standard auto or home insurance, your options may be somewhat limited.

Remember, insurance is a financial product. As a result, how you’ve handled your finances in the past will have a direct result on how much leeway your insurer will offer in the form of collecting insurance premium dollars.

What’s the background behind down payments & installment options? 

The down payment, which is typically necessary to issue a policy or personal loan, can be paid with a debit or credit card, electronic check (provide you account numbers directly over the internet), cash, or paper check at the agency (not too common anymore), or in some cases you may be billed by mail for your down payment.

Don’t expect to get by with no down payment if your insurance score is less than perfect. In fact, some insurers will require a bigger down payment if that is the case. Your insurance score acts sort of like your credit score – the better it is, the better your financial options.

Progressive, for example, offers several down payment options, which affect how many installments are required to completely pay the policy.

There are really two options here. They are referred to as ‘direct bill’ and ‘EFT’, which is short for electronic funds transfer.

Direct Bill – Simply refers to bill by mail. You get a paper bill in the mail, which has a due date for the premium payment. You simply mail a check back for the premium amount or, in many cases nowadays, you can go to the insurer’s website and make an electronic payment (on any day you wish, as long as it’s before the due date). Any payments processed after the due date will likely be assessed a late fee.

Worst case scenario here is that your coverage may lapse if you make a payment too late. Then you run the risk of being uninsured until your policy is reinstated – which may carry a hefty $25 fee!

EFT – These are payments swept from a registered credit card or checking account on a pre-determined basis. Could be each month, quarterly, semi-annually or annually. Insurers like this program because they don’t have to wait for payment and they know right away if you’ve got the money in the account.

Premium Finance – Here’s a bonus option. This is typically reserved for commercial insurance policies in which the insurer doesn’t offer payment plans other than paid-in-full. If you can’t pay the policy in full at inception, you’ll have to secure a premium finance agreement with a lender who will pay the policy in full and accept installments from you…with interest of course. (For more information, read our “What is premium financing?“)

Which option is cheapest?

As alluded to above, insurers have a preference as to how they would like you to pay for your policy. They make it clear by how they adjust your insurance costs based on which plan you choose.

If you pay by EFT, the insurer will usually waive the installment fees, which range from as little as $3 per installment all the way up to $15 per installment. The average monthly installment fee is probably about $5 though. But your policy could still be more expensive than paying in full.

Direct billing by snail mail will cost you the most in the long run. You will lose any discounts for paid-in full or EFT installments and may be subject to installment fees (read our full “Five Insurance Fees To Watch Out For” for more information). Also, you run the risk of missing a payment and having your coverage lapse.

Tip: It will always be a better deal to pay the policy in full, as you avoid any installment costs. Additionally, you may receive a discount for doing so that will range from 5% to as much as 20% in rare cases. The average savings is 10%.

What’s the conclusion?

Your insurance payments aren’t set in stone. There are various payment plans offered, though they vary from company to company. Obviously what you pay is going to depend on what type of coverage you’re getting, and which company you’ve chosen, but you’ll also have choices on how you make your down payment as well as your premium payments.