Insurance. It’s the necessary evil, right? Hopefully, we never have to use it.
When we don’t have to use it, we feel like we’re just throwing our money away. However, we’re grateful that it’s in place when we experience a catastrophic event and we rely on our insurance to cover it. Most of us don’t have the cash available to pay $300,000 or more if we cause a bad car accident, re-build our home if it is lost to a fire, or pay for some extremely expensive health care expenses. That’s why we protect ourselves with insurance.
So, if we know that we need it in place, then why not make it as cheap as possible? I recently renewed my auto insurance and I was offered two payment options: pay in full or billed installments. I paid the bill in full because I knew that I would need the insurance in place over the next 6 months and, through previous research, I knew this was the cheapest premium that I could find. What’s outstanding to me is that the billed installments ended up being a 36% more expensive than paying the bill in full.
Why not pay the bill in full?
I suspect that some people have trouble with parting with a large chunk of money at once, or maybe they simply don’t have it available, and see the monthly payment as a better option. However, we can see that it’s clearly not. If I would have opted to pay the bill monthly, then I would have been on the hook for over 1/3 more than what I had to pay by paying it in full.
I prefer to pay the premium in full and save the monthly amount so that I know it’s available once the premiums come due again. For example, let’s say that your auto premiums are $600 semi-annually with the option to pay the $600 in full or make monthly payments of $136. In this case, I would pay the $600 and make sure that my budget includes a savings goal of $100 per month for the next 6 months so that I would have that money available once the premium comes due again. Of course, this strategy doesn’t take into consideration any potential premium increases, but it can be used for other coverages that you have as well such as life insurance and renter’s/homeowner’s insurance.
