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I ran some numbers on a Traveler's quote, and the interest rate on it was only about 13.22% APR -- that's pretty good considering many other insurance companies charge a lot more.
Do insurance companies charge interest? Technically, no — they do not. However, the combination of the paid-in-full discount, the installment fees, and other charges result in an interest rate that can vary depending on the amount of the policy. Here's an example:
J is buying a car and wants to get coverage on it. Progressive is offering to insure him for $392 for 6 months paid as $65.35 down and $66.33 a month. This includes a $1 installment fee per EFT payment. Or he can take advantage of the paid in full discount by paying $358 all cash.
All of this information can be put into a financial calculator (or an Excel spreadsheet) to determine what the effective interest rate is.
PV = $358 (paid in full amount) less $65.35 (the down payment) = $292.65
FV = 0 (at the end, nothing is owed).
n = 5 payments (a down payment and 5 installments).
PMT = $66.33 (many calculators require you to put this number in as negative).
So in Excel just type in =RATE(5,-66.33,292.65) and you get 4.320% a month or 66.12% APR!! Those $1 EFT fees really add up when the total premium amount is low.
By way of comparison, the insured could put the whole amount on a credit card at 26.82% APR (2% a month) interest, pay the $65.35 down immediately and pay the rest over 5 months at $62.09 and save $4.24 a payment.
And this is not because the insured has bad credit — on the contrary, he has an excellent score otherwise he'd never get rates that low for full coverage on a brand new car!
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