Wednesday, 23 September 2015

Credit agreement for insurance

This bugs me.

I have insurance for home contents, and it is a one year policy, but I pay monthly by instalments. This means I have to have a credit agreement and interest.

But insurance is inherently a service provided on an ongoing basis. The fact that I am insured tomorrow is of no use to me today. It only matters once tomorrow has come and gone, and if, by then, the insurance has not been cancelled for some reason.

So if I am getting the "product" of insurance on an ongoing basis, month by month, day by day, hour by hour, yet I am paying each month in advance, why do I need "credit"? It simply makes no sense to me.

Some might say that I receive a whole years insurance in advance, and I have that now, and it is mine, so paying for it at the start makes sense (and hence spreading payments is credit). However, and do correct me if I am wrong, if I stop paying half way through the year, will they not cancel the policy? If there is any way they can cancel the policy part way through the year for any reason, then clearly that policy and year's worth of insurance was not mine in the first place, and it really is being "provided" on an ongoing basis.

It seems wrong, and I can only assume it is some historical quirk that it is allowed to work like this.

9 comments:

  1. Indeed, and if you cancel your policy half way through the year, then you're entitled to a pro-rated refund on the portion of the time you have paid for, but not received service for.
    When I worked in an ISP, customers paying annually rather than monthly were great for the company, because the company were effectively being given an interest free loan for 11 of the 12 months by their customers. This was especially so in the case of dialup when there are no per-installation supplier minimum contract terms to worry about.

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  2. I think it is effectively, paid in advance with a "loan" to repay.

    If you claim part way through the year then you can't then cancel the insurance and you have to pay all the instalments.

    If you cancel part way throught the year you get a refund (which may or may not be enough to cover the remaining instalments)

    Probably, if you stopped paying part way through the year they would deem it as you having cancelled - you would get a refund which, if it wasn't enough to cover the remaining instalments, would leave you on the hook for the remainder (which may be small enough that they just write it off in this case)

    What we really need is someone who was paying by instalments who cancelled their policy towards the end of it's term and see if they had to pay some extra to cancel.

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  3. I pay annually, the cost of the credit for monthly insurance payments is extortion in my view. Everything else is paid monthly either for free or there's a discount for it. Why the hell does insurance still cost extra to pay monthly?

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  4. There's an oddity if you've actually claimed - if you cancel and have claimed you generally get no refund / have to pay all the remaining payments.

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  5. When my car was stolen a while back my insurance was cancelled from that point on as I no longer had a car (despite the fact that it covered other things like allowing me to drive other cars in a limited way) AND they deducted the cost of the remaining installments from the money they paid out even though they were covering me for nothing for them. I was not happy but I'm told that was normal.

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  6. Isn't this just to do with the fact that insurance is priced based on an aggregated risk - aggregated both across the population of customers and across the term of the insurance? So you can't buy less than a year's car insurance - you're placing a bet with the insurance company about the likelihood of an accident *any time in the next 12 months*, and they're assuming that's a predictable (-enough) mixture of high and low risk time over those next 12 months.

    So they don't want to sell you a month's insurance, because then they might need to think about whether insurance should cost more in January than in June, and you might buy different insurance at different times of the year.

    The credit agreement is a way of being absolutely explicit about what's happening - you're clearly separating the commitment to purchase 12-months' insurance (paid up-front) from the process of deferring the payments. Seems like a good thing, really.

    I suspect that's actually some fairly clear regulatory/legal stuff behind this to do with insurance having to be paid for in advance, but I don't know any detail.


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  7. Halifax seem to be breaking this trend. They now allow you to pay by monthly direct debit and it costs the same as paying annually. Reckon we can convince gov.uk to do the same for road tax?

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  8. My understanding is that it's a 12-month contract payable in advance. So, as Will says, that's why monthly payments are structured the way they are.
    If you read the contract, you'll see (as John did) that on a total loss (be that through theft or damage), the contract comes to an end, but no refund in payable.
    Under (most) other termination situations, a pro-rata refund is payable for the unused term of the policy.
    I got one when my licence was revoked for medical reasons, but then found that single-person insurance is a higher risk (and thus more expensive) than self-and-spouse. Annoying, but my son who works for a broker tells me this is the case.

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  9. Insurance isn't so much on an ongoing basis, technically you're buying it at one point - the start - for a whole year. I see you've anticipated this however:

    >>>>Some might say that I receive a whole years insurance in advance, and I have that now, and it is mine, so paying for it at the start makes sense (and hence spreading payments is credit). However, and do correct me if I am wrong, if I stop paying half way through the year, will they not cancel the policy?

    It depends on your insurer. Some insurers will not cancel your policy if you have made any claim during the period (Endsleigh stung me for this).

    May I recommend my former employer - NFU Mutual - They don't apply that rule, and if you're paying on a monthly basis then they only charge something like 1-2%, as opposed to others who have insane Direct Debit charges. They do cost a little more - but as I'm sure you're aware given that you run AAISP - when you pay more, you tend do get more.

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