Paying for car insurance: automatic payment plans

Is it okay to have automatic payments withdrawn from your bank account to pay your auto insurance? That depends on how you handle your finances. Whether your car insurance company calls it an easy pay plan(ez pay), a recurring monthly payment option, automated funds transfer, electronic funds transfer, or simply automatic payments, if you need to pay your auto insurance monthly, a great way to save money, & avoid the bother of writing checks & mailing bills,  is to choose your auto insurance company’s automatic payment plan.

Allstate, Farmers, State Farm, Progressive, Geico, etc., just about all auto insurance companies  promote their automatic payment plans  for their convenience to the customer, and as a “green” (i.e., environmentally friendly) option. Automatic payment plans go by different names depending on the insurance company, but they all work in a similar fashion.

The insurance company has you complete & sign a form with your bank information — the bank’s routing number, and your checking or savings account number — authorizing your insurance company, to work with your bank, to deduct your monthly auto insurance premium on a set day each month ( the 15th of the month, for example). Usually a voided check or deposit slip is required.

Once your auto insurance company has your signed & completed form, the insurance company then coordinates with your bank, to have your bank send the insurance company payments from your bank account electronically, on the day of the month you chose to have it paid.

Auto insurance companies love customers to choose their automatic payment plan, because it lowers the insurance company’s cost of having to bill you every month, reduces the number of policies canceled for missed payments, and helps the insurance company keep customers from switching to a different insurance company.

To induce policyholders to sign up for their automatic payment plan, some car insurance companies offer discounts, reduced installment fees, or no installment fees.

One company I have worked for in the past, had no installment fees on their monthly automatic payment plan, so you paid the same amount as if you had paid your policy in full (There was no discount for paying in full, but there were no installment charges, either). If you wanted to be billed monthly, you would have a $4 installment fee on each bill.

Another company, where I have worked previously, offered a 3% discount for choosing their automatic deduction plan, and the monthly fee was only $1, as compared to the $4 installment fee for each direct bill.

You definitely can save money choosing an automatic payment plan.

However, your bank paying your auto insurance, direct from your account automatically, can cause problems for certain customers, and these automatic payment plans are a frequent source of complaints from auto insurance customers. For some customers, automatic payment plans work like a dream; for others, they work like a nightmare.

So, here are a few warnings, to see if an automatic payment plan will work well for you:

1. In order to get any discount and/or lower fees, you have to sign up with your auto insurance company for the plan, and allow your insurance company to set up the plan with your bank.

Using your bank’s online bill pay, or setting up an ACH  deduction through your bank, will NOT get you any discounts or lower installment fees offered by your insurance company’s automatic payment plan.

2. If you don’t balance your checking account, are known to have even the occasional overdraft, or often keep a low balance in your bank account, do not sign up for an automatic payment plan. 
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These automatic payment plans only work smoothly if you always have the money available in your account  on the day the amount is to be deducted.

There is a misconception your insurance company goes into your bank account the day of the draft and takes the money. The way it really works is your insurance company notifies your bank in advance how much money the bank should be sending the insurance company on the draft date.

For example, your insurance company will notify your bank, on the 1st of the month, they should deduct $100 from your bank account on the 10th to pay for your auto insurance, and send it to the insurance company.

If you call your insurance company on the 2nd day of the month, and say you need to stop the draft, because you will not have enough money on your account on the 10th, it will be too late. The bank has already been told how much to send to the insurance company on the 10th. You will have to call the bank to put a stop pay on it, there may be more than one attempt to draw the money, and you may have fees from both the bank and the insurance company.

Automatic payment plans only work well when the customer always has enough money in their bank account to cover the amount drafted.

3. If you make frequent changes to your auto insurance, which increase and decrease your insurance premium, you may not want an automatic payment plan, unless you have plenty of money in your account to cover a large increase in the amount deducted.

Another misconception is, when you are signing up for an automatic payment plan, you are authorizing a specific amount to be deducted from your account.  The amount deducted will go up or down if your auto insurance premium changes.

Referring to the previous example, say you called your car insurance company on the 2nd, not to stop your bank draft for $100 on the 10th, but to add a car. The increase in your premium from the day you added your car until your policy renews again is $200. The insurance company has already notified your bank to send $100 on the 10th, so your bank sends the insurance company $100. The next month is the last month until your policy renews again. So, the $200 for adding another car will be added on to your last payment.  $300 will be deducted on the 10th of next month. The following month, your auto insurance renews, so your deduction on the 10th of the following month will drop to $200, if your insurance premium did not increase at renewal.

You are notified by mail in advance when your amount to be deducted from your bank account changes.

However, if you make frequent policy changes, your auto insurance is expensive, you don’t have a cash cushion  in your account, or you are struggling to pay your bills, a big change in the amount deducted from your account, even if it is a one time only increase as described above, can lead to problems and fees if the amount does not clear, or you don’t have the money to pay for other needs because of the deduction.

Given these warnings, if you always know how much is in your account, have extra money in the account as a cushion, and don’t make frequent policy changes, an automatic payment plan may be the best choice for you.

If you haven’t shopped your car or homeowners insurance in the last few years with at least five other companies, there is a good chance you are paying too much. Has your agent or company ever thoroughly reviewed your coverage, policy limitations, & exclusions?  If you don’t think you need to shop with other insurance companies, you need to read my webpage showing you the 8 things every insurance buyer needs to know here.

What are your experiences with automatic payment plans? Comment on my facebook page. Follow me on Twitter for important insurance consumer news and new blog entries at CarInsWatch.