Car Insurance Policy Terms: 6-Month vs. 12-Month
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UPDATED: Mar 13, 2020
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We all like choices. When it comes to car insurance, some choices are more difficult, such as Med Pay vs. PIP, while others are a “no-brainer.” This post fits into the latter category.
We’ll let the cat out of the bag right away and tell you the 12-month auto insurance policy is the way to go…if you can get it!
Put simply, the 12-month policy term allows you to lock in a lower car insurance premium for a longer period of time.
There is really no downside, because if you find a lower premium any time during the policy term, you can typically switch insurers and get back any of your unearned premium in the form of a refund check.
Why Insurers Only Offer 6-Month Policies
The odds are you didn’t even know you had a choice in the matter. But before you rush to call your agent or dig up your most recent policy declarations page, we should point out that many of us don’t.
Several insurers, including national chain companies such as State Farm and Allstate, don’t offer a 12-month auto policy option. So what, right?
Well, the reason why many insurers don’t offer the 12-month policy may make you feel differently about the matter.
News flash! Insurers are out to make money. Almost any question relating to insurance is ultimately answered by following the money trail…so let’s follow it and see where we end up.
The answers to why many insurers don’t offer a 12-month auto policy term, which would make everyone’s life easier, have to deal with both how our car insurance rates are determined and how insurance companies make money.
There are two basic reasons insurers like the 6-month policy term, both of which revolve around being able to make premium adjustments more quickly if need be.
The Ability to Make Quick Program Changes
Insurers won’t know if they are making money for a few years after they sell a particular product. Basically, an insurance company sets their rates, sells as much of their product as they possibly can, then sits back and collects data for about a 1-2 year period and see if they charged enough to make a profit after paying for all of the claims and operating expenses.
Many insurance claims take more than one year to settle, which increases the amount of time insurers need to see if they have a winner.
If they charge too little, they lose money. If they charge too much, they risk losing market share to insurers with cheaper rates. So they may be able to also lower rates more quickly, although this is much less common.
Where does your 6-month policy term come into play? Well, assume the insurer realizes they are charging too little for car insurance. Instead of having to wait an entire year (12-month term) to increase your premium accordingly, they can start renewing policies at a higher premium in as little as six months.
It may not seem like much to us when our policy goes up $15 every six months, but multiply that $15 by 300,000 policies and we’re looking at $4,500,000. So your insurer may be leaving millions of dollars “on the table” in just a six-month period!
The first reason deals with insurance at the macro-level. Six-month policies allow insurers to react more quickly to pricing mistakes or unexpected claims. Think about Hurricane Katrina.
Car insurance companies were not expecting to have hundreds of thousands of claims for water-damaged vehicles when they originally priced their product prior to the hurricane.
But, you can bet they needed to raise their rates in response to the storm, and the quicker the better (for them).
Pricing Control at the Individual Level
Insurers also like to have more control over pricing at the individual level. There is much less risk for an insurer at the individual level, but they still like to be able to make adjustments.
What adjustments may be necessary at the individual level? It is important to understand that your insurer cannot raise your premiums midway through a policy term, even if you get a ticket or have an accident.
However, they can certainly raise your premium at renewal. With this in mind, most insurers would prefer to be able to raise (or lower) your premium at six-month intervals rather than once annually.
For example, if you received a speeding ticket three weeks into your six-month policy term, you’d have about five months left paying your current premium. You’d have eleven months at the “pre-ticket” premium on the 12-month policy.
Tip: Insurers who offer both six and 12-month policy terms may not offer both to you. Your driving and credit history, including your MVR, C.L.U.E. and insurance score reports may be evaluated before offering you the coveted 12-month term.
Any “activity” on these reports or a less-than-perfect credit history may force you into a six-month policy, as you have demonstrated that the insurer may need to bump your rate up more quickly in the event your past will predict your future, which is how all insurance rating works.
Many of the insurers who offer a 12-month premium may charge slightly more for this policy term option. Why? Because they know they are stuck with that rate for 12 months and cannot make any changes.
Remember, rates typically go up, so the 12-month option is more secure for you.
But be sure to shop around as you might find a 6-month policy that is SIGNIFICANTLY lower than a 12-month policy from another insurer. And you won’t know for sure unless you compare rates!
Read more: How to lower your car insurance premium.