Auto insurance: installments or upfront?

[Scanner]

Good news - my auto insurance actually went down (I guess the accident came off 3 years ago).

I pay $1828 if I pay a year up front.

I could as an alternative pay 8 installments (probably the next 8 months) of $234.50. That's an extra $48.00.

That represents a 2.5% surcharge.

What would you do?

My inclination is to spread it out, since I am enterng Triple Whammy November - Christmas bills, auto insurance, and property tax installment.

[JanH]

We used to pay in 2 installments of six months. But they came due at tuition time for college kids--both installments. Double Whammy for us. So we opted for monthly installments. The auto payment system has greatly improved since we did this years ago and we opted for that also. The cool thing for us I think, is that they are able to readjust things more quickly when things change. We've had a couple of reductions and one increase. But then we don't get a whopper of a change in six months. We get it a month at a time and can adjust easier.

[sweeps]

I pay 6 months in full. Not worth the fees to go monthly, plus I like not worrying about it every month. I also pay with credit card to get 1% cash back.

(A 1 year auto insurance policy? Never seen that before.)

[Scanner]

(A 1 year auto insurance policy? Never seen that before.)

Well, it's funny, Sweeps.

Last year, I bitched to my agent that my car insurance was costing about $3200/year for a 99 Ford Taurus and a 04 Matrix.

I thought an agent was supposed to shop for you. So, at my insistence, they shop and find a company that if you pay a year up front, it was $2200.

So, of course, I bite. . .sure. . .I'll pay the year. Heck, it would have been fine to finance it at 15% interest to save $1000.

Well, this year, they charged $1828 (so even lower) but the year up front is apparently optional (I may call to verify this since last year, the low premium was dependent upon money upfront).

It's a no-name insurance (NJ Skylands) but it's rating is strong and I haven't seen many complaints with the Dept. of Banking and Insurance.

Anyway 2 lessons for the Frugalmeisters here:

1. It may pay to shop to see if you can be flexible with a yearly payment plan.

2. Don't depend on your agent to shop for you. (I was disappointed on this - I thought that was their job. . .apparently it's to just move product)

PS: anyway, from an interest standpoint - if they are only charging a 2.5% surcharge, wouldn't it be better to hold onto the money in an account earning 4% (average daily balance around $8000).

[jodi]

Before I had my insurance direct-debited from my paycheck, I used to pay it all at once. I think it was the principle of them tacking on an extra $5 per month to pay it in installments that got to me! Also, I just liked being done with it instead of having to worry about paying it every month.
With my union, I get a 10% discount with Liberty Mutual and they direct debit it from my paycheck every two weeks - it's a win-win situation, since I don't have to pay it all at once but I also don't get charged any fees. I checked around a while back for better rates, but most of the companies would only do 6 month plans. I hate the idea of having my rate increase after 6 months, so I try to stick with year contracts.

[PrincessPerky]

We do ours in advance, I would rather have myself covered in case of oh I dunno emergency and bills don't get paid (not that I wouldn't have the money, but what if I don't pay the bills?) The more things I can take off my 'have to do even if someone dies' the better IMO.

[myself]

Originally Posted by Scanner

Well, this year, they charged $1828 (so even lower) but the year up front is apparently optional (I may call to verify this since last year, the low premium was dependent upon money upfront).

It's a no-name insurance (NJ Skylands) but it's rating is strong and I haven't seen many complaints with the Dept. of Banking and Insurance.

PS: anyway, from an interest standpoint - if they are only charging a 2.5% surcharge, wouldn't it be better to hold onto the money in an account earning 4% (average daily balance around $8000).

Remember, even though the average daily balance is around $8,000, that has no impact, since it would only be $1,828 less that would be in there. So the interest difference is really 4%/yr for $1,828 (or $73 ... or $6.09/month that you'd be earning).
But of course, you'd have to subtract off the interest you paid each month for the surcharge or $3.43/month.
So, in the long run, you'd be making about $2.66/month if you kept your money in the savings and paid the surcharge.

PS: We have Allstate. If memory serves me right, we pay $1,670/yr for full coverage for two adults on 2 new vehicles (2004 & 2007) in NJ with nothing on our driving records. Every time I shop around, I can't get a better deal than that unless the coverage goes down, or the deductible goes above $500 (and even then it's usually minimal). We pay 6 months at a time to avoid paying the $3/month surcharge (or 2.1%).
Oops, I forgot to mention that we also charge it (but of course pay it off when the bill arrives). So we get 1% back when we pay for it via our rewards card.

[InDebtInDC]

What kind of coverage do you have on your policy?

[Scanner]

InDebtDC,

Reasonable question.

We have $100,000/$300,000, I think. It may be $250,000/$500,000 actually. I seem to recall the agent's assistant telling me it was only a few dollars per year extra and I bit. I tend to take higher coverages since I am a doctor and I am a natural target. Like on my homeowners, I upped the liability on our property to $250,000/$500,000.

We have rental car coverage for 30 days.

$500 deductible. . .mmmmm. . .could raise that to a $1000.00. . .not sure. . .would have to discuss it with wife. Would probably leave that.

And I did elect to raise disability payout for 6 months from $100/week to $400/week. I don't think I would touch that. That $400/week would come in handy since I own a business in the case of an auto accident (knocking on wood).

Anyway. . .as you can see, I have more than usual coverage so I would expect to pay more.

So. . .if the 4% interest is a wash against the 2.5% surcharge. . .I would probably elect to not pay it upfront to lower my bills this time of year.

[InDebtInDC]

I recommend you to review your policy to see what kind of coverage you have.

The biggest thing is you don't want duplicate coverage with another insurance policy you may have.

The liability limit seems a little high. What is your state minimum?

I don't think rental coverage is a good idea unless you're a reckless driver.

Do you have disability insurance coverage somewhere else?

[sweeps]

I wouldn't skimp on the liability coverage. The state minimums are way too low. My cousin has 100/300. He rear-ended someone, she said she was totally fine, and then 3 months later claims to have serious back problems and is suing for much more than the $100,000 that the insurance company will cover. (Note that the lower 100 number is per person. The higher 300 number is per incident and only applies if you injure more than one person.) I have 250/500 myself... it doesn't cost much more than 100/300.

Edited to add: On the flip side I also would not skimp on the uninsured/underinsured coverage. There are a lot of people out there with insufficient liability insurance. If they injure you or damage your property, you want to be compensated.

[Scanner]

The liability limit seems a little high. What is your state minimum?

$10,000/$30,000, I think.

I don't think rental coverage is a good idea unless you're a reckless driver.

Well. . .this is auto accident capital of the US here - NJ. It doesn't matter if I am wreckless. It's just odds.

I could "self-insure" the rental. They pay $30/day for 30 days or up until the check is cut for the Blue Book value (so $900). I don't know. . .my wife was in an accident 7 years ago and me 3 years ago and it was kind of nice to not have to worry about that.

Do you have disability insurance coverage somewhere else?

I don't. My occupation is hard to find coverage.

[MonkeyMama]

Oh yeah - I wouldn't drive a rental in Cali either without insurance. Could matter less how well you drive - there are a myriad of idiots our there. Very small price to pay for peace of mind. (Though you should be covered by your insurance in most cases. But in doubt I would pay!).

& Ditto Sweeps on liability coverage. The minimums are not entirely sufficient with what goes on out there.

I just wanted to say I Would always pay up front, no installments. Just a waste of money. If you feel it would be too tight though, you may want to break it up and in the meantime start saving the money to pay cash up front next year. It's just a timing thing, but the latter costs more money (paying monthly).

[Scanner]

I have the money one way or the other.

I just hate to see the cushion be drained.

Property tax: $2000
Car Insurance: $1800
Christmas: $1200

That's $5000 going out in about a matter of 45 days, along with the other normal bills.

[InDebtInDC]

Originally Posted by MonkeyMama

Oh yeah - I wouldn't drive a rental in Cali either without insurance. Could matter less how well you drive - there are a myriad of idiots our there. Very small price to pay for peace of mind. (Though you should be covered by your insurance in most cases. But in doubt I would pay!).

I think he's referring to rental cost reimbursement, not coverage for driving a rental.

[disneysteve]

I used to pay in full every 6 months, but the past couple of years I've been splitting it into 2 or 3 payments just for cash-flow convenience. I know I'm paying a little extra that way but it avoids having to pull money out of high-yield savings to make the full payment up front. It ends up costing me something like $20 each year to split it up. I'm okay with that.

[InDebtInDC]

Originally Posted by Scanner

What would you do?

Mathematically, if you could invest the lump sum amount - down payment amount and earn more than the surcharge amount over the life of the policy, then you are better off paying installments. If not, you're better off paying the lump sum.

If you have cashflow problems then you may not have a choice but to pay installments.

From my experience in the insurance industry, I would never pay a lump sum premium, no matter how much the surcharge is. This is because you may withhold payment any time and switch carrier. If you paid the lump sum you're at the insurance company's mercy and they get to decide how much, and if, to refund your money.


There is a lot more involved in dealing with insurance companies but that's outside of the scope of your original question.

[sweeps]

I've never had a problem getting a pro-rated refund when I've cancelled/changed a policy.

[disneysteve]

Originally Posted by sweeps

I've never had a problem getting a pro-rated refund when I've cancelled/changed a policy.

Me neither.

[InDebtInDC]

With all due respect, this is from my personal experience and I have seen hundreds if not thousands of insurance policies from all the major carriers. The average consumer will have personal experience with ten or twenty policies at most during their lifetime.

So of course my perspective will be skewed. So take what I say with a grain of salt, as you should with anything anybody says.



Back to the original topic, you're looking for the net present value (NPV) of the installments: Net present value - Wikipedia, the free encyclopedia

I used 30-year Treasury bond rates as the riskfree rate. As of today it's 4.69%. You have 8 payments in 1 year so the periodic riskfree rate is 0.58% per 1.5 months.

My calculated NPV for the installments is $1838.17. I checked this with several online calculators and we're consistent.


So what this means is you can either make the lump sum payment of $1828, or you may pay the first installment of $234.50 and deposit $1603.67 into an account that pays you 4.69% APY. When each subsequent installment is due, you withdraw $234.50 and pay. By the 8th payment. your account will be zero.

Based on this calculation, you save $10.17 with the lump sum ($234.50+$1603.67=$1838.17). If you can earn more than 4.69% with your account, then the numbers start favouring the installments.


In view of the issues I raised above regarding proration and cancellation, it has been my personal experience that a proration is always done in the insurance company's favour, and you'll like lose more than $10.17 if you cancel midterm. This is because it takes a while to get your refund, and they may deduct more money than you think. Some companies are better than other but generally this has been my experience.


If I were calculating this for my work (add 3 zeros behind each of your numbers), I would still tend to favour the installments even though it costs $10,174.03 more. $10,000 is a lot of money, but when you're looking at a $1.8 million insurance policy it's about 1/2 of a percent. I would recommend this option to preserve cashflow and maintain flexiblity with the insurance carrier. I would make the same recommendation to you since $10 is such a small number to preserve cashflow and maintain flexiblity.