How and why is it that insurance companies can charge interest on unpaid premiums?

Question

I have to agree with the Muslims here; interest is evil. Especially when you're paying interest on such an intangible as insurance, and statistically, I probably won't even use it.

Answer 1

Never heard of that.  There may be a late payment penalty.  Pay your premiums on time and it won't be an issue for you.

Answer 2

I work for insurance and the best thing is to locate a company that doesn't charge interest.  What kind of policy is charging interest anyhow?  This is baffling because I haven't heard this ripe off yet.

Answer 3

Unpaid premiums are effectively the company lending you money.  

In my experience, about half the people with monthly payments - the insurance company lending them money - don't pay on time.  Then the insurance company has to mail them a late notice.   And if they still don't pay, then they have to mail them a cancellation notice - in some states, it must be certified mail.  

All that costs MONEY.  They charge interest, to cover the expense of collecting the money.  If you don't want to pay it, pay in full.

It takes two people for a loan - the lender, AND the borrower.  Don't be the borrower, and then there won't be a lender.  Problem solved.

Answer 4

Most companies don't charge "interest" they charge installment fees, usually ranging from $4-$6 per installment.  If the premium payment is late, they charge late fees - normally $5-$25 depending on the company.  I actually have one company that doesn't charge a late fee at all (I think they are crazy).  These are administrative fees, to cover the paper, envelope & mailing expenses (also the cost of receiving & posting the payment & the accounting work involved).  

If you do not wish to pay installment fees, pay your whole premium in full at the inception date (6 months in full on a semiannual or 1 year in full on an annual policy).  Some companies, like Progressive actually give an a pay in full discount, in addition to  not having to pay installment fees by paying in full.  

Most companies do not charge installment fees if you sign up for electronic funds transfer (EFT) out of your checking account.  Progressive will charge $1 per installment for EFT but they do give a discount for EFT (that is in between the installment billing premium & the pay in full discounted premium).

Statistically, you will use insurance, in some way, shape or form sometime in your life - even if only for a broken windshield.

Answer 5

You are using the insurance protection, and apparently you believe you can use it without paying for it. Just because you haven't received any payment back from the company doesn't mean you aren't using it. You can't have an accident, and then decide you want insurance. That is like going to Vegas and trying to place a bet after the roulette wheel stops.

Answer 6

You don't have interest on unpaid premiums...what you think if your premium is late that you can just pay the interest and whola your policy is back in force?  doesn't work that way, you either pay or you lapse. Now, a premium loan is another thing. For example, if you have a life insurance policy that is whole life and you borrow from it, from your cash value you have to pay that loan back with interest usually at 8 %. You need to atleast pay the interest on the loan every year even if you don't pay back the loan.

Answer 7

If you keep your policy in force for the rest of your life, the statistics are very strong that you will use it.  Having said that, the reason insurance is so cheap (compared to the cost of the risk) is because both parties agree you probably won't need the coverage right now.

If you don't like paying interest on missed premium payments, try term insurance.  With term, if you miss a premium payment, your policy might be canceled rather than having the opportunity to make up for the lost time value of money.