Beware of pay-by-the-month insurance

Many insurers allow payment of premiums on a monthly basis so instead of having one large annual outlay you can budget for smaller monthly payments. But some insurers penalise you for the privilege of monthly premiums so that twelve monthly payments total more than one annual payment.

Last year I choose to make monthly payments rather than the yearly payment. I invested the money in a high interest savings account at 4%. As a result I lost $24.25. If my investment returned 8% or more then it would have been better to make monthly payments.


Monthly Payments

Yearly Premium = $1445.00
Finance Charge = $43.35
Total Monthly Premium = $1488.65

Interest Gained on Monthly Premium at 4% = $33.49
Capital Gains Tax 22% ($37,885 and $75,769) + 9.15% ($36,021 +$72,040) = 31.15%
Tax Paid on Interest = $10.43

Return = $20.29


Yearly Payment

Yearly Premium = $1445.00
Finance Charge (not paid) = $43.35

Interest Gained on Finance Charge at 4% = $1.73
Capital Gains Tax 22% ($37,885 and $75,769) + 9.15% ($36,021 +$72,040) = 31.15%
Tax Paid on Interest = $0.54

Return = $1.19 + $43.35 (Finance Charge (not paid)) = $44.54


Increasing the Deductible

Going for the higher deductible always results in a lower insurance premium. To check how much I used the online insurance estimator for PC Insurance (Scottish and York Insurance) and came up with the following rates.

Comprehensive Coverage Insurance

• $300 Deductible = $1410 Premium
  
• $500 Deductible = $1379 Premium, Savings $31
  
• $1000 Deductible = $1346 Premium, Savings $64
• $2000 Deductible = $1301 Premium, Savings $109
  

Compared to the increase in the deductible the savings in the premium was not comparable. If you changed from $500 deductible to $1000 deductible to save the $33 in premium you would have to drive 15 years accident free to realize the $500 savings.