Is car insurance paid in advance? Or do you pay as you go? Today, we’re answering any questions you might have about paying car insurance in advance.
When you buy a car insurance policy, you are required to pay your bill upfront. The insurer must collect a premium – a payment – in order for your insurance policy to be considered binding and up-to-date.
Years ago, users needed to pay their entire insurance policy upfront: you could only pay for auto insurance for six months or one year in advance. You needed some foresight and careful budgeting to ensure you had enough cash on hand.
However, as more states began to require drivers to have auto insurance, insurers began to make insurance more convenient by offering monthly payments.
Today, most people pay their car insurance on a monthly basis. Your annual (12 month) or semi-annual (6 month) policy is split into monthly payments. Instead of paying $1,000 every year, for example, you pay $83.33 every month.
Every time you settle your monthly premium, your insurance policy will be up-to-date until your next bill is due. This means your insurance policy is legal and binding until you next bill is due. If you miss your next payment, of if you’re late, then your insurer may decide to cancel your policy.
Of course, just because most people make monthly car insurance payments doesn’t necessarily mean you should make monthly payments. You can pay your car insurance in advance to save money, for example.
Should You Pay Car Insurance in Advance? Or Should You Pay Monthly?
Typically, insurance companies will charge a small premium for monthly insurance payments.
If your insurance policy is $1000 a year, for example, then an insurer may charge slightly more than $83.33 per month when paying monthly. They might raise your insurance policy to $1050 per year, for example, or $87.50 per month.
This premium occurs because you’re effectively “borrowing” money from the insurance company. You’re “financing” your annual insurance policy into more convenient monthly payments. The insurance company also likes to receive the entire guaranteed amount upfront, and they’ll reward customers for doing so.
Of course, lump sum payments aren’t ideal for everyone. Some people live paycheck to paycheck. Other people don’t have $1000 lying around at all times throughout the year. In this situation, monthly payments can be convenient and easy.
Benefits of Monthly Payments
Monthly payments are the best option for some people. Monthly payments give you a small, manageable amount of money to pay each month. You can focus on paying that small monthly bill without stressing over a larger lump sum payment every 6 to 12 months. Other benefits of monthly payments include:
- Monthly payments mean you don’t have to save extra cash throughout the year for your auto insurance
- Monthly payments are ideal for those who live paycheck to paycheck, or for anyone who doesn’t have a large lump sum of cash available at all times throughout the year
- Monthly payments allow you to know the due date of your car insurance every month instead of waiting to hear from your insurer about your entire premium payment
- With monthly payments, you can set automated payments by linking your insurance to your bank account or payment cards, reducing the risk that you’ll ever make an error
Benefits of Annual or Semi-Annual Payments
Some people prefer making a single large payment every 6 to 12 months. You might prefer one single payment, for example, instead of worrying about 6 to 12 smaller monthly installments. Other benefits of annual or semi-annual payments include:
- With annual or semi-annual payments, you’re buying a full year’s worth of peace of mind; you won’t have to worry about missing a due date or incurring late payment fees during that year, nor will you have to worry about insurance getting canceled because of a missed bill
- Some people find it easier to track, manage, and pay a single annual bill as opposed to keeping track of monthly bills
- Some people prefer using a certain lump sum payment – like a Christmas bonus or tax refund – to pay their insurance policy every year
- Insurance companies will typically provide a discount to customers who make annual insurance payments as opposed to monthly installments
Types of Insurance Payments
Insurance companies may offer different ways to pay your insurance bill. Some available payment methods include:
Full Pay: You pay for an entire 6 or 12 month policy in advance. You pay the entire fee, and then you’re covered for the entire 6 or 12 month period.
EFT: EFT, or electronic funds transfer, is when the insurance company takes a payment out of your checking account or debit card every month on the same day. As long as you have sufficient funds in your account, you’ll be able to pay your car insurance bill.
Quarterly Payments: Some insurance companies offer a mix of monthly and annual/semi-annual payments by letting you pay quarterly. Quarterly payments don’t typically come with a discount, but they may be more convenient for some insurance policyholders.
Monthly Billing: Some people prefer monthly billing, where they receive a bill every month on the same date. You’re in charge of paying that bill any way you like.
Car insurance is typically paid in advance. In fact, you’re required to pay for your car insurance in advance. Your car insurance is not considered legal, binding, or valid until you pay your premium.
Just because you have to pay car insurance in advance doesn’t mean you need to pay your entire annual or semi-annual bill in advance. You can pay monthly installments, for example, paying for each upcoming month in advance. Alternatively, some people prefer paying one large lump sum bill every 6 months or 12 months.
Ultimately, policies vary between insurance companies. Talk to your insurance company to see if you can save money with annual or semi-annual insurance payments.