Paying Insurance Premiums Monthly vs. in Full: The Hidden Interest Rate
Installment fees on insurance premiums can work like a loan with a double-digit interest rate. Here is how to calculate what paying monthly really costs.
Many insurers let you pay a policy's premium in full or in installments. Installment plans sometimes add a fee to each payment, or the total of monthly payments is simply higher than the paid-in-full price. Either way, paying monthly is effectively borrowing part of the premium, and that "loan" has an interest rate you can calculate.
The example
A hypothetical annual auto premium:
- Paid in full: $1,200 today.
- Monthly: 12 payments of $105, the first one due today. That's $1,260 total, or $60 more.
Paying $60 extra might not sound like much. But you're only "borrowing" the money for part of the year, and the balance shrinks every month. Solving for the interest rate that makes those payments equal to $1,200 today:
| Payment plan | Total paid | Extra cost | Implied APR |
|---|---|---|---|
| Paid in full | $1,200 | — | — |
| 12 × $103 | $1,236 | $36 | about 6.5% |
| 12 × $105 | $1,260 | $60 | about 10.8% |
| 2 × $610 (now and in 6 months) | $1,220 | $20 | about 6.7% |
Show the numbers behind this chart
| Implied APR | |
|---|---|
| 12 × $103 | 6.5% |
| 12 × $105 | 10.8% |
| 2 × $610 | 6.7% |
How to calculate your own
- Find the paid-in-full price and the total of all installment payments, including fees.
- Note when each payment is due.
- Use a spreadsheet's IRR or RATE function, or an online loan calculator, to find the rate at which the installments equal the paid-in-full amount today.
If the implied rate is higher than what you earn on savings, and you have the cash, paying in full saves money. If the alternative is carrying a credit card balance at 22%, a 10% installment plan is the cheaper option.
Other factors
- Discounts. Some insurers offer a separate discount for paying in full, or for automatic payments and paperless billing. These can make the gap larger or smaller.
- Cancellation. If you cancel mid-term, unearned premium is generally refunded under the policy's terms, sometimes minus a fee. Paying in full doesn't usually lock you in.
- Missed payments. Installment plans add the risk of a missed payment leading to a cancellation notice. Grace periods and notice requirements vary by state and policy.
- Cash flow. For many households, spreading payments is worth the cost. The point is to know the cost.
The takeaway
Installment fees on insurance work like interest on a short-term loan. Calculate the implied rate. If you have the cash and the rate is meaningful, paying in full is often an easy saving.
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