How do auto insurance payments work?

Did you know that auto insurance premiums can be paid up front for the year, although most insurance companies allow you to make payments on a monthly payment plan.

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Mathew B. Sims is Editor-in-Chief and has authored, edited, and contributed to several books. He has been working in the insurance industry ensuring content is accurate for consumers who are searching for the best policies and rates. He has also been featured on sites like UpJourney.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years (BBB A+). He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com and Safeco. He reviews content, ensuring that ex...

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 25, 2021

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Here's what you need to know...

  • When you buy auto insurance, you are obligated to pay your premiums to keep your coverage active
  • Most auto insurance companies have flexible payment plan options that will fit almost anyone’s budget
  • Managing your auto insurance policy in this day and age is easier thanks to multiple types of payment plans
  • If you can’t pay in full, you may be able to pay monthly, quarterly, or semi-annually
  • When a payment is due, you will receive a bill detailing your due date and payment amount
  • Some companies will offer you the option to go paperless — which could save you a service fee


You buy insurance the moment that you buy your first car, but that doesn’t mean that you know what you’re paying for.

It’s critical you understand how your insurance contract works before you assume that you are protected every time that you hit the road.

Personal Auto Policies are long, legally-binding contracts that explain what the insurer agrees to cover when you pay your premiums, which is called the insuring agreement.

While you do have to comply with some other terms and conditions, your biggest responsibility as a named insured is to pay your premiums on time. It’s crucial to understand how your auto insurance payments work.

Start comparison shopping today by entering your ZIP code in our FREE tool above!

What is an auto insurance premium?

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The first step to learning how auto insurance payments work is to learn the definition of an insurance premium. Premium is a term that’s frequently used in the insurance industry.

It refers to the amount of money that a policyholder must pay to an insurance company for the coverage that they select.

Auto insurance policies are contracts. Under contract law, the premium is defined as “consideration.” Consideration is a vital element in the law of contracts and is required to make a contract valid.

By making your premium payment to your insurer, you are fulfilling this essential element that makes your contract valid in the eyes of the law.

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How are your auto insurance premiums calculated?

Auto insurance companies set their own rates and must file them for approval through the state.

Once rates are made, the company must assess the risk to come up with your personal rates. Everyone is charged a unique premium.

If you feel like you’re a better driver than your friend or your sibling, it can be shocking to discover that you’re paying a lot more for your insurance.

Many factors affect your insurance rates. The insurance rating factors are what are used to calculate personal rates. Knowing these factors can help you understand why rates vary so dramatically from household to household.

Here are some factors that could change how much you pay for your coverage:

  • Age, gender, and marital status
  • Licensing status and driving history
  • Accident history
  • Vehicle usage and driving habits
  • Annual mileage
  • Vehicle type, safety record, and safety features
  • Credit rating
  • State and territory

More Information About Premiums

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Your first premium payment is due when you activate your insurance. Your coverage does not take effect until you make your first payment.

If you decide to pay the policy in full at inception, then you won’t have another premium payment until the renewal is processed.

If the underwriter assigned to your file changes your rating class (for instance, failing to disclose an accident or a driving infraction), your premium could increase in the middle of your term.

Otherwise, your premiums will only change if you make a change to your policy.

Insurance companies offer their policyholders the option to split up premiums by making their payments in installments.

With most companies, you can choose to make payments monthly, quarterly, or semi-annually. A majority of companies also offer you an automatic payment option where payments will be taken from your account each month.

Notification When Your Bill Is Due

If you want to make your payments manually, you will get a bill in the mail about two to three weeks before the due date. When the company prints a bill, you will pay a service charge.

Some companies charge a percentage of the balance and others charge a fixed fee. To avoid the fee, you should consider going paperless so that you will receive email notices when your bills are due.

If you don’t make your payment on time, your insurance company can cancel your coverage. Some insurers are kind enough to give you a grace period to make your payment. After the grace period ends, the policy will cancel.

If you don’t currently have coverage, you should shop around for competitive rates.

Use our FREE online price comparison tool by entering your ZIP code, compare instant quotes, then make your payment to keep this policy active.

References:

  1. http://www.investopedia.com/terms/p/premium.asp
  2. http://www.consumerreports.org/cro/2010/09/should-you-go-paperless/index.htm
  3. http://www.investopedia.com/terms/i/insurance-premium.asp
  4. http://thismatter.com/money/insurance/insurance-contracts.htm
  5. http://apps.americanbar.org/litigation/committees/insurance/articles/mayjune2012-insurance-101.html
  6. http://www.tdi.texas.gov/pubs/consumer/cb020.html
  7. http://insurance.illinois.gov/autoinsurance/shopping_auto_ins.asp
  8. http://www.aldoi.gov/consumers/AutoUnderwriting.aspx
  9. http://carinsurance.about.com/od/CarInsurance/a/What-Is-Electronic-Funds-Transfer.htm
  10. http://www.dfs.ny.gov/consumer/faqs/faqs_auto.htm

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