Are flexible payments for car insurance worth it?

Tamara E. Holmes

While a number of car insurers charge customers the entire premium amount upfront, some let drivers pay the premium over a series of months, forking over little or nothing on the front end. The pay-less-now option may sound attractive, but be warned: It comes at a higher cost.

The average car insurance premium for a car is $1,031 a year, according to the Insurance Information Institute. Coming up with that chunk of money can be challenging for some drivers; being able to pay a premium over time can help.

“Most flexible auto insurance policies allow customers multiple payment options,” says Loretta Worters, vice president of the Insurance Information Institute.

Naturally, pay-in-full policies are the least risky from the insurer’s standpoint, since the insurer is getting all of its money upfront. Recognizing that such a policy may not work for many consumers, most car insurers offer a monthly payment option as well.

Reducing the risk

While the ability to pay a premium over a period of time can be great for consumers, there is an element of uncertainty for the insurer. For example, if a driver has an accident, the insurer may have to settle a claim with no guarantee that the customer will finish making premium payments.

To reduce some of that risk, many insurers charge customers a down payment, typically due before the coverage kicks in. Generally, the down payment is a percentage of the premium that goes toward the entire balance.

Insurers typically come up with their own rules about which drivers are eligible for which payment options. For example, some may decide that customers need a strong credit history to be able to pay in installments. Some may have flexible payment plans for lower-income customers; others may offer that option to all customers. For example, Nationwide offers a down payment of one month's premium to all customers in just about any state, says Elizabeth Stelzer, a Nationwide spokeswoman.

In some cases, insurers offer more lenient payment options, such as lower down payments or no down payments at all to longtime customers when it’s time for them to renew their policies. For example, GEICO lets new customers put down 25 percent of the total premium and pay the entire bill in five installments. On the other hand, renewing GEICO policyholders need to put down only 16.66 percent of the total premium. They then would make five additional monthly payments of 16.67 percent each to pay the premium in full.

The pitfalls

While low- and no-down-payment policies can be a lifesaver for someone low on cash, they come with their own set of downfalls.

• They may cost more money in the long run, since many insurers add a surcharge to each bill when a premium is divided into numerous installments.

• Using these options may make you ineligible for some discounts. For example, many insurers will award a discount to customers for paying the entire premium upfront, Worters says.

• You must keep up with the regular payments. If you don’t, you run the risk of having your insurance policy canceled, as you haven’t paid the entire premium upfront. However, one way to reduce the risk is to automate the process. Some insurers offer automatic payments from your checking account or credit card, Worters says.

Before going with a low- or no-down-payment option, consider all other alternatives. Even if the offer sounds good, another may be better. Other types of flexible payment plans include making payments every other week, as well as scheduling larger payments over a shorter period.

Always ask about incentives that come with each option. For example, Nationwide customers who choose to have their car insurance premiums paid monthly through automatic withdrawal can save up to $48 a year, Stelzer says.

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