Opinion
How paying car insurance monthly could cost you twice
Nicole Pedersen-McKinnon
Money contributorAs bad luck goes, last April 5, Jacinta (not her real name) and her husband had a lot of it. Both of their cars were parked out the front of their Sydney house when the torrential weather flooded them. Both were written off.
But it was then that the gods of misfortune really frowned on the couple. Jacinta’s car was insured with NRMA, and she paid premiums monthly.
There’s a costly, yet common, clause in many car insurance contracts that may take you by surprise.Credit: iStock
Unbeknown to her, NRMA, like many insurers, requires payment of the remaining year’s premiums before they will cover a claim.
The extremely unfortunate thing was that Jacinta’s policy was just four days into a new insurance year.
So, before NRMA would do a thing to replace her destroyed car, she had to pay 11 months of future premiums … thousands of dollars.
But, logically, the real icing on the bitter insurance cake was this: when Jacinta’s relatively new Toyota Kluger was eventually like-for-like replaced from overseas three months later, she had to insure that one too.
The information is buried deep in the fine print of the product disclosure statement on page 28. Few of us ever get that far.
It means that this year she is effectively paying double premiums, one set for a car that no longer exists.
Finder insurance specialist Peta Taylor confirms this costly clause often takes people by surprise in pay-by-the-month car insurance contracts. “It’s just not well-known among drivers, and that’s where people are coming undone,” Taylor says.
“This is a good reminder to take the time to really read the fine print. This is where policy terms are communicated. Unfortunately, many policyholders don’t do this, and that’s why it ends up being so shocking.”
The information is buried deep in the fine print of NRMA’s product disclosure statement on page 28 of 29. Few of us ever get that far (realistically, we don’t make it past page 1).
But the pay-as-you-go condition is really the complementary application of what most insurers do if you pay annually up front: being entitled to a refund if you cancel a policy is usually predicated on not having made a claim at all, and almost certainly on not having claimed for a total loss.
Only then would you ordinarily get a pro-rata refund if you later decided to leave. Equally, if you pay monthly and your car (or another) is destroyed, you forfeit the whole year’s premiums, even if you have yet to pay them.
Of course, what exactly you’re entitled to in terms of backing out of an annual policy is likely to differ from insurer to insurer, and you’ll also need to factor in any cancellation fees.
Indeed, every policy tier, within each insurance category (comprehensive or compulsory third party), within each insurance brand will carry its own condition. A statement from IAG, the biggest general insurer for Australia and NZ, with NRMA, budget Rollin and also CGU motor insurance, said:
“When a vehicle is a total loss and the policyholder receives the full benefit under the policy, either by receiving a new vehicle or a cash settlement for its value, the policy ends.
“As the policyholder has received the full benefit of the policy, any outstanding premium instalments need to be paid by the policyholder. Having received the full benefit under that policy, if the policyholder buys a new vehicle, a new policy also needs to be purchased.”
I also note that though Jacinta’s policy included just two weeks of hire car cover, NRMA extended this to one month in recognition of her long three-month wait.
Back to your own policy, though: don’t miss that when you pay monthly, most insurers add a loading too, about 30 of them.
Of those, Finder research shows there’s about a 15 per cent increase that applies verses annually. Usually, this amounts to a difference of about $200, but for a more expensive premium, it can increase it more than $650.
And yes, any at-fault claim makes premiums more expensive, adding between 11 and 28 per cent, depending on the insurer. The average among the providers Finder looked at was about 20 per cent.
Bottom line? If you cause an at-fault write-off, to your own or someone else’s car, you could face an unexpected bill of up to a year of premiums. And your premiums from your next policy anniversary or the next time you apply will probably be dramatically higher.
Nicole Pedersen-McKinnon is author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, X and Instagram.
- Advice given is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.