Paying by Instalments
Most insurance providers offer the facility to spread the cost of your insurance over the months that it runs e.g. 12 months. There are some things that you need to be aware of when deciding if to pay by instalments or pay the whole premium in one go.
You would be forgiven to think that as you get the benefit of the insurance cover over the whole year that it shouldn’t cost any more to pay for it on the same basis. Unfortunately, most insurance companies don’t work like this. When you pay for your insurance over the 12 months you are buying the policy at the annual costs and then taking out a finance package to spread the cost. In the industry it is known as “premium financing”. This is similar to taking out a personal loan to pay for your insurance. The interest rates for premium finance can be high – some are higher than 30% APR.
Home Insurance added on to mortgage
If you take your home insurance through your mortgage provider sometimes they will add the premium to your mortgage. This means you will be paying interest on the loan for your home insurance.
Interest free instalments
Some insurers offer interest free instalments to customers. These are more widely available on home insurance. If you want to pay for your insurance monthly then make sure you take the benefits of interest free instalments in to consideration.
There is a benefit to insurers for encouraging their customers to pay monthly in that generally people who pay monthly are less likely to shop around. This could be because an increase from £30 per month to £35 per month doesn’t seem that much whereas £360 to £420 feels like more.
Instalments can affect your premium
Something that most people will not be aware of is that some insurers use your payment method as what is known as an underwriting factor. As such you may have to pay more for your insurance on renewal if you previously paid by instalments. I can only guess as to the reasoning behind this and it may be one of two things
- Because they can – people who pay by instalments are less likely to shop around at renewal so some insurers may think why not charge a bit more and increase our profits.
- Paying by instalments may be seen as a wealth indicator – Some insurers believe that people with less money are more likely to claim. If you pay by instalments it might be interpreted by insurers that you are doing this because you have less money to be able to pay for it in one go.
They key with all insurance products is to shop around each year to make sure you get the best deal. Sadly in insurance loyalty does not pay.