How to Choose Monthly or Annual Auto Insurance Premium Payment Plans

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Here's what you need to know...

  • When buying auto insurance, there are many factors to consider
  • Knowing how much coverage is required by your state is mandatory
  • You can pay your auto insurance bill annually or monthly

There are many decisions to make about auto insurance like how much coverage to carry, what kind of deductible to have, whether to add on extras like towing coverage.

You’ll also need to decide how and when you’ll pay for this coverage.

Most insurance companies give you the choice of paying for the entire policy at once or spreading out the payments over each month. But which is the best? It depends on your circumstances.

Getting multiple car insurance quotes is easy when you enter your zip code into our FREE tool at the top of this page!

Annual Payment

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When you pay for your auto insurance annually, you have the advantage of getting that bill out of the way for the entire year. This is extremely helpful to people whose income fluctuates throughout the year or is seasonal.

Perhaps an accountant who makes a lot more money during tax season could use some of that to pay the car insurance bill for the next year, reducing expenses during leaner months.

If you tend to be forgetful about paying bills, paying the insurance premium once a year could save you money if you usually incur late fees. It could even save you from having your coverage canceled because you are behind on your payments.

Perhaps the biggest reason to pay your premium in full is that many companies give you a discount for paying it in full. If doing so will save you money, then it is definitely worth looking into.

In some areas of the country, auto insurance is charged semi-annually rather than annually. Before committing to this, make sure you are comfortable with having this policy for the next year.

Monthly Payment

Nearly all insurance companies now allow you to pay the premium on a monthly payment plan. Instead of paying the entire premium at the beginning of the year, the premium is divided by 12, and that amount is due each month.

However, some companies charge an installment fee for this convenience. This stems from the fact that it makes for more work on their part to process 12 payments rather than one.

Even if the fee seems modest, it can add up over a year. If the company charges $5 a month, that’s $60 a year you’re paying for the privilege of paying monthly.

Even with an installment fee, there are some definite benefits to paying the premium each month. It fits in better with the way most people budget.

Since most people have a fairly standard income each month, it makes it easy to set aside the premium to be paid along with the electric and water bill.

It also prevents you from having to come up with hundreds of dollars all at once. This is especially beneficial to those on limited incomes to begin with.

This also might be a better choice for those who expect a major change in their policy before the year is up. If a young man is about to turn 25,  he may want the freedom to find the cheapest insurance when that happens.

If you have a son or daughter about to move out or get married, you’ll want the ability to take them off the policy and see immediate savings.

Other Payment Discounts

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Before you decide whether an annual payment or monthly payment schedule is best, you should look into other payment discounts you might be eligible for.

With the advent of online bill paying, many companies are giving discounts to clients who use electronic payments to cover their premiums.

Some companies also give you a discount if you set up automatic payments with them.

This allows the company to withdraw a set amount from your checking account on the same day each month. Not only can this option get you a discount, but you’ll never have to worry about paying that bill each month.

Often the discount you receive for electronic or automatic payments offsets any installment fees you might pay each month. So if you’re vacillating between annual or monthly payments, find out they offer any of these discounts.

For more help with shopping for auto insurance, Consumer Reports has some helpful tips.

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What You Are Paying For

What exactly is your premium paying for? It pays an insurance company to cover damages to cars and injuries incurred in an accident. This type of insurance is required in nearly every state.

Auto insurance can be broken down into different parts. No one part covers every issue. Even more confusing is that some of the parts are required by law in some states, but not in others.

Liability is the most important is required in all but one or two states. Even those states require it for most people. When you cause a car accident, liability pays for the other car to be repaired or replaced. It also pays for medical bills of anyone in that car, as well as lost wages because of the injuries.

Uninsured/underinsured motorist covers damages to you or your car if some else is at fault, but they don’t have insurance or don’t have enough. It also covers hit-and-run damages.

Collision coverage pays for your car to be repaired if you are at-fault in an accident. Comprehensive covers your car in non-accident related incidents, like hail damage or car theft. These aren’t required by law, but if you have a car loan, your lender does require them.

PIP and medical payments pay for your medical expenses and those of your passengers.

These will usually pay no matter who caused the accident. Some states require you to carry one or the other, but they are optional in the others.

For a fuller explanation of your auto insurance, see the National Association of Insurance Commissioners’ guide.

Ways to Lower Premium

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No matter how you pay your premium, there are ways you can reduce the total. If you have comp and collision, look at your deductible. The more deductible you agree to pay, the lower the premium for the policy will be.

To keep your premium as low as possible, raise your deductible to $1,000. Then set aside $1,000 in a savings account that is only to be touched when you need to pay a deductible.

If you have an older car, you may find that you don’t need to have comp and collision at all. If the car is paid off, it is optional coverage.

Financial advisors usually suggest that if the premium for only the comp and collision parts is more than ten times what the car is worth, you probably aren’t getting your money’s worth out of the policy.

Just remember that if you drop comp and collision, you are completely responsible for any repairs if you wreck it.

If it’s totaled, you’ll get nothing for it from your insurance company if you are at-fault.

Other Discounts

Another way to save is to ask for discounts. There are many discounts you could be eligible for, and they don’t require you to alter your coverage.

If you have more than one vehicle on the policy, you’ll get a discount on both.

In fact, the more insurance you can buy from the same company, the more you’ll save on all of them. Many car insurance companies will also cover motorcycles, RVs, and boats. If you put them all on the same policy, you’ll get a discount on each one.

For even more discounts, look for auto insurance companies that also offer homeowners or renters insurance. When you purchase both policies from the same company, you’ll receive a discount on both, usually a pretty significant one.

If you have a clean driving record, ask for a safe driver discount. You can also take a defensive driving course whether or not you’ve had a traffic ticket, and you’ll get a discount on that as well.

If there are any high school or college students on the policy who makes at least As and Bs, be sure to ask for a good student discount. Since young drivers in this age group pay the highest premiums, this can help offset their higher insurance costs.

While it isn’t a discount, a great way to save money is to look at several different companies before you buy.

No two companies use the same formula when determining a quote. So when you get quotes from different companies, you are getting a better picture of what the lowest price you could pay.

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