QUESTION: The insurance on my pickup is due for renewal in July. The way things are shaping up, I will not be able to find all of the money to pay the premium. My friends tell me that I cannot buy coverage for less than 12 months. Is this really true? Are there any companies that will allow me to pay it over a six-month period?
- E.C., Port Antonio,
Portland.
ANSWER: Your question has more to do with financing than insurance. This, however, will not stop me from trying to solve your problem. Some insurers (and brokers) are in the insurance and finance businesses. Others handle only the former. They leave the latter to specialist and other firms that provide financing, either by itself or sell it with other services. Your insurer appears to be in the second group, or, if they finance premiums, they need to brush up on their marketing.
Banks, finance companies and general insurers (and some brokers) provide funds to consumers to pay their insurance premiums. This type of business is called insurance premium financing (IPF). IPF is like hire purchase financing. Buyers do not have to find the entire purchase price at all once. It allows the purchaser to spread the payments plus interest over a fixed period 24 months in the case of HP, and 10 months for IPF. A deposit may be paid when the contract is signed. The agreement also sets out how the outstanding balance will be paid. This is usually by way of equal payments of pre-agreed amounts (including interest) at agreed dates.
Interest rates for IPF loans are calculated on an 'add-on' basis. This means that the rates are much higher than they actually appear. This is because interest is calculated on the original amount of the loan and not on the reducing balance. Two examples should make this clear. An 'add-on' rate of 12 per cent is the equivalent of an annual per centage rate of 21.5 per cent, where interest is calculated on the reducing balance. A 15 per cent add-on rate is the equivalent of a 26.6 per cent annual per centage rate where the interest is calculated on the reducing balance. This means that consumers, like their counterparts who buy goods by way of HP, pay substantial amounts in interest costs when they finance their premiums this way. IPF provides real benefits when buyers do not have the funds to pay for the protection that they need.
AN IPF SOLUTION
An IPF loan can provide a solution to your problem. I would suggest that you phone a few finance companies and compare their terms (i.e., add-on and effective interest rates, initial deposit, loan period and the monthly payment). The yellow pages are a good place to start looking for information. With interest rates trending downwards you could end up with very competitive terms.
At least two of the 12 motor insurers offer premium payment plans. The plans apply only to those customers whose policies are not placed through an intermediary. In other words, if you have a broker or an agent the plan is not available. Your broker or agent is expected to negotiate credit for you.
THE PROCESS
Both plans operate in much the same way. The customer is expected to pay a deposit representing between 25-50 per cent of the premium (plus GCT) at the outset. The insurer provides credit for a pre-agreed period of either three or six months. A certificate of insurance is issued for that period not the usual 12 months in a case where the premium is paid in full. When the balance (including GCT) is paid plus a service charge another certificate of insurance is issued for the remaining period. The service charge varies according to the credit period, the premium and the insurer. In comparing this plan with IPF check whether the service charge is greater or lesser than the interest costs under IPF.
I certainly hope that I have given you some credible options for financing your premium. I believe that they are far superior to running around naked.
Cedric E. Stephens provides impartial advice about risks and insurance. If you need free information or advice to solve a problem, write to The Financial Editor, or contact Mr. Stephens directly at aegis@cwjamaica.com
