Paying premiums painlessly
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The idea is so simple it's surprising it's not been tried before but now you can spread all your insurance payments over the year and not worry about big payouts when you're experiencing a 'negative cash flow.' John C. Vann examines the deals offered by the major insurance companies
, LIKE most things in these inflationary days, insurance premiurns continue to rise in nearly all classes of cover, and the increases can be substantial.
With the recession causing all sorts of cash-flow problems for many busineses, premium payment on an annual basis is not always easy or convenient. The answer lies in premiums paid by instalments.
The majority of insurance companies operating today offer some kind of instalment plan for commercial and industrial policy premiums.
General Accident General Accident runs a popular instalment premium plan which is operated by a fullyowned subsidiary company, Multiple Credit Services (MCS). Its attraction stems from the fact that it allows insured persons to pay their personal premiums of £50 or more over five months, for a service charge of only £1 irrespective of the size of premium.
The scheme also allows business policyholders to pay premiums over five, six, seven, eight or nine months. In this case the service charge ranges from one per cent for premiums paid over five months to three per cent for those paid over nine months.
"We believe we're giving policyholders the benefit of one of the cheapest credit schemes available in the market today," a General Accident spokesman said recently. "For example, the true rate of interest for a personal policyholder paying £200 is three per cent, while for a business policyholder paying the same premium over five months, the true rate of interest would be 6.1 per cent and over nine months it would be 9.3 per cent. Compare that with over 20 per cent for leading credit cards and it soon becomes clear that the benefits to all our insured are very real indeed," he added.
Three conditions are laid down. First, by law, a policyholder has to be at least 18 years old. Second, the credit agreement must be for a minimum of £50. Third, payment has to be by direct debit. A note of warning here is that if the payments fall into default, all policies affected by the credit arrangement will be cancelled immediately. This could be serious. Further, there will be no return of any payments made before cancellation date. Commercial Union CU Credit is the name given to the instalment scheme of Commercial Union. You pay one-fifth of the total premium due at the time of taking out a new policy or at renewal date with an existing policy. The balance is paid by four instalments at monthly intervals by direct debit through a bank. The charge for this facility is £1 per £100 premium (or part of £100), with a minimum of £2. This represents interest at an annual percentage rate of, for example, 6.2 per cent on a premium of £200. For lower amounts of premium, because of the £2 minimum charge, the rate rises to, for example, 9,3 per cent on a premium of £150 and 18.5 per cent on a premium of £75.
Norwich Union Norwich Union is keen on the instalment premium method. The lowest premium for instalment treatment has been reduced from £200 to £50 for individuals. For personal business where the annual premium is at least £50, payment of the premium can be spread over five instalments. The service charge is one per cent, resulting in a true rate of charge of 6.2 per cent. Should personal premiums amount to £5,000 a year or more, the policyholder can pay by instalments over ten months at a four per cent charge (true rate 12.5 per cent).
On the commercial side, instalments are open to registered or limited companies. For premiums of at least £50, the charge is the same as that for personal policies, spread over five instalments. If the commercial premium is £200 or more, however, the instalments can be spread over ten months at four per cent.
Sun Alliance The instalment premium plan of Sun Alliance is different in that premium payments can be spread over the whole year — in twelve equal instalments. This plan is available to all policyholders. The annual premium need only be £30 or over for participation in the plan. The instalment charge is six per cent, which is equivalent to a yearly rate of charge of 13.7 per cent.
Excess Insurance Group The Excess Insurance Group has plans for commercial and industrial Excess policyholders. One plan gives credit without charge and thus warrants close attention. Five instalment payments are involved, but the minimum annual premium has to be £500 before this plan can be installed. The premium is divided into five equal instalments. The first of these, due on the commencement date of the risk, is paid to the Excess by cheque. The remaining four instalments are paid by a banker's order. Neither interest nor a service charge is added.
The other plan divides the annual premium into ten instalments, but here the minimum annual premium is set at £1,000. A service charge of two per cent is made under this plan, representing a true annual rate of 5.44 per cent.
The Prudential The Prudential has just introduced a new monthly instalment scheme called Budget 12. By using direct debit, this scheme enables the Pru's 4 million policyholders who have domestic, motor or business insurances to spread the cost of their premiums over a 12-month period. The payments can come straight from the bank or National Giro current account in a dozen equal monthly instalments. The policyholder has to be paying premiums of at least £30 a year to take advantage.
A Prudential spokesman said that Budget 12 provides a more economical means of staggering premium payments than using Access or Barclaycard (current interest charge is 23.1 per cent) or a bank overdraft (at least 14 per cent interest). The Pru charges 5.7 per cent to policyholders who make use of this new credit facility. This service charge works out at an actual percentage rate (APR) of exactly 13.0 per cent. An example is where, say, an annual premium for a haulier comes to £250. Under Budget 12 there would be twelve monthly payments of £22.02, giving a total cost of £264.24.
If your premium should be changed mid-term, say, because of an increase or decrease in your cover or sums insured, under these instalment schemes, the normal course is that any additional or return premium will be dealt with separately from the credit plan.
Further, if a policy is cancelled, any refund of premium to which you may be entitled under usual policy conditions will be returned, bearing in mind the amount you have paid up to the cancellation date. This assumes that the cancellation is not caused through default.
If you are interested in paying by instalments, you can always check with your insurers or agent as to whether you can pay by instalments in future.