Do I have to pay for car insurance upfront?

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Joel Ohman
Founder, CFP®

UPDATED: Jul 20, 2017

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Here's what you need to know...
  • A car insurance quote isn’t binding and doesn’t provide any type of protection to the person who requested it
  • Once an application for coverage is submitted, coverage may be afforded until the information has been fully underwritten
  • In order for a claim to be covered during this underwriting period, a payment must be submitted
  • Some companies will only charge for the first month’s premium to start a policy while others will charge a down payment
  • It’s important to review the payment options before selecting a policy if you’re looking for flexibility
  • If you’re a high-risk driver or you have a low credit-based insurance score, there’s a good chance that you’ll be asked to put down money to secure coverage

When you buy auto insurance, you’re billed for the coverage that you select before the coverage is actually afforded.

Since you pay in advance for your liability and sometimes physical damage coverage, you have peace of mind in knowing that any future claims that you file during that period will be covered. Unfortunately, things aren’t so cut and dry when it comes to paying for a policy at the time of inception.

Consumers have the right to compare auto insurance rate quotes for free. Since they don’t have to pay to look at the rates from insurer to insurer, it’s a very competitive marketplace.

When that consumer goes from quoting coverage to applying for it, it’s time for the tender. Companies will ask all serious applicants to provide their initial payment upfront when they submit their application.

How much the company asks for depends upon your rates, the state, and the company’s policy as it pertains to down payments.

Start comparing car insurance rates now by using our FREE tool above!

Why are auto insurance rates charged in advance?


Whether you pay for the entire year or you choose to pay in installments, you’re paying for coverage that will be provided in the weeks or months to come and not in the months that have recently passed.

This is because insurance is a unique product. Unlike a cable contract that you use every month, insurance is a contract that you hope not to put to use.

If you don’t have a claim, it’s nothing more than a piece of paper saying that the company will have your back in the future if you need them.

The only way for the company to protect itself is to collect money for coverage dates before they come. There will be no issues regarding backdated claims and no collections notices because of missing payments.

If the policy isn’t paid within the time allotted for the grace period, the coverage cancels and the insurer is no longer on the hook.

Once a quote is given is coverage afforded?

A quote isn’t binding. It’s nothing more than an estimate that shows a prospective policyholder how much they’d pay for insurance with a specific company.

By using the personal information, the company is able to tell you how much you will pay for an entire term of coverage as long as you were honest and forthcoming.

When is an application binding?


After you compare quotes, you will then need to decide which company you’ll proceed with. When you proceed you enter the application stage of the process.

This is where you must provide accurate information and sign disclosures so that the company is able to verify your driving record and credit record.

In addition to providing details on your driving record and driving history, you’ll be asked to submit your initial payment. An application isn’t actually submitted until you submit a minimum payment amount that’s required by the carrier.

This is because auto insurance is a contract and for that contract to be valid consideration, also known as money, must be collected.

When the payment is submitted and the application is in the hands of the underwriting department, you will have coverage against losses.

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How much consideration is due to bind coverage?

How much you must pay when you’re starting a policy depends on a few different factors. Years ago, most insurers would charge their customers a down payment for insurance.

This down payment would cover the costs to underwrite and process an application so that the insurer wouldn’t suffer a loss if the customer canceled the policy.

Now, down payments aren’t always required. If they are, the state will dictate how much a company can require that someone pays. Here are some factors that can affect whether or not a down payment will be requested:

  • The carrier that you’re buying from
  • Whether or not you’re a high-risk driver
  • If the company typically does business in the high-risk market
  • If you’re doing business with a brokerage
  • Your credit record if you’re in a state where insurers can run credit
  • If you want to pay the policy in full
  • State requirements

What is the most common down payment option?


If you can’t afford to pay in full or quarterly, you should have more than a monthly payment available to start your policy.

The most common down payment requirement for 6-month policies with standard insurers is the 5 Pay Plan.

Under the 5 Pay Plan, you’ll pay the first and last month down. You’ll then pay 4 installments and you won’t have a monthly payment the last month because you paid the fee at startup.

Not having the payment at the end of the term is something many clients look forward to.

What payment methods are accepted for a down payment?

You can pay your initial payment in a number of different ways. Most insurance companies accept payments by credit or debit card as long as the card is in your name.

If someone else is paying your premiums, you’ll need their authorization before you can run the card.

If you’re going to have the payments automatically drafted from your account, you’ll need a canceled check. This will show your routing and account number so that you can set up the EFT draft.

Just be sure to cancel that draft if you ever decide to leave the carrier.

Remember the Binding Period

Insurance companies in a majority of states have a 60-day binding period to review the risk that they have taken on. During this time, the insurer can modify the rates or even terminate the policy.

It’s most common for a company to order a cancellation when the applicant wasn’t honest.

If this happens and the policy goes through a rescission, here the cancellation is backdated and the entire premium that you paid will be returned.

You do have to pay for your premiums upfront. How much you’ll need to pay can vary. Be sure to compare auto insurance quotes to find the best rates before you apply.

After using an online comparison shopping tool, proceed with an application and choose a payment method that works for you. Enter your zip code in our FREE tool below to start comparing car insurance rates now!

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