When my husband and I moved to New Jersey, I was in a rush to get auto and homeowners insurance policies bought and out of my hair. More than anything else in my own personal finances, I hate dealing with insurance. Especially for cars. Not only can shopping for coverage be confusing -- with many choices to make and many companies to compare -- but I'm just not a car person. To me, anything dealing with my car is a hassle.
So when my real estate agent, who's also a long-time friend, recommended I call her insurer -- Liberty Mutual -- I was quick to throw comparison shopping to the wind. I figured, after I was moved into my new home and the boxes were unpacked, I'd find some time to make sure I was getting the best service and the best price for my insurance dollars.
Getting the policies was easy enough. The cost was reasonable -- only slightly higher than what I was paying for coverage before I moved. I sent in a down payment check for the coverage and went on with the rest of my life.
Until the first bill came.
Instead of paying for a year of coverage, I'd elected to pay monthly installments. For the convenience of paying this way, most insurance companies charge between $1 and $4 for each monthly payment. I was paying $3 per installment with my old insurance company, and I was expecting a similar charge from Liberty Mutual.
Instead of a convenience fee for monthly installment payments, the company was adding a finance charge on the unpaid balance -- 1.25 percent a month, or 15 percent a year.
I couldn't believe my eyes. I don't even keep a balance on my credit cards -- now I should pay interest for an insurance policy?
So my research began. It turns out that New Jersey isn't the only state where insurers may impose finance charges on premium installments. Arkansas, Delaware, Florida, Georgia, and Louisiana also allow the practice -- and there may be more. I didn't call the insurance commissioners of all 50 states, and there is no industry-wide list available to check.
A spokesperson at the New Jersey Department of Banking and Insurance told me there's no provision under New Jersey law that allows or disallows these charges. But Liberty Mutual is the only company operating in the state that charges this way. In Florida, there's a specific statute that reads, "An insurance agent or agency may charge a rate of interest not to exceed 18 percent simple interest per year on the unpaid balance." The Florida insurance commissioner's office wasn't sure which companies imposed finance charges.
Why Do They Do It?
It seems obvious that companies will earn more money with finance charges than with flat fees. But the finance charges aren't very consumer-friendly, so why would companies risk losing customers like me?
I called Liberty Mutual, based in Boston. After about a week of looking into the issue, spokesman John Cusolito said the company uses the finance charge to "cover the cost of services" in the state -- such as a toll-free number, 24-hour claims assistance and a local presence in the state with 11 offices. He says there's an extra cost to insurance companies in New Jersey from a recently-passed bill that requires insurers to staff a "call center" to answer consumer questions.
Does Liberty Mutual offer these services in states where there are no finance charges? I asked. Yes, Cusolito said.
So I'm not sure that I buy the "cost of doing business" argument. Other companies offer the same or similar services in this state, and they don't use finance charges.
Not every Liberty Mutual customer is subject to the finance charge, Cusolito told me. Depending on where a consumer buys a policy, the charges are different. If I had gone to an agent instead of directly to the company, I would have been charged a flat $3 fee per transaction instead of the finance charges.
Cusolito also told me, "Competition is very intense in the personal auto market. We have a 95 percent retention rate in New Jersey, and we have competitive rates."
I give him that.
I called around for quotes for myself. Liberty Mutual was by far the least expensive, with a total premium of $1,732, not counting the finance charge, for my Chevy Venture and my husband's Chevy Cavalier. Allstate, for example, said it would charge me about $2,600 a year for the same coverage. Travelers said $1,980 and State Farm said $2,416. All the quotes were for full coverage: $250,000/$500,000/$100,000 liability and uninsured motorists, plus collision. (That means a $250,000 bodily injury liability maximum for one person injured in an accident, a $500,000 bodily injury maximum for all injuries in one accident, and a $100,000 property damage liability maximum in one accident.
Though these other companies are permitted to use finance charges, they don't do it -- at least not in New Jersey. Why not?
"We just don't want to do business that way," says State Farm spokeswoman Anna Campagne from company headquarters in Bloomington, Illinois. "We want to retain our customers." Spokespersons from other companies gave me similar answers.
Read the fine print. Make sure you understand how your insurance company plans to collect your premiums. If it's not clear, ask your agent. He or she should be able to clarify the policy so there are no surprises when the bill comes.
Call your state insurance commissioner. The office will take complaints and offer information about how insurance business is conducted in your state. Visit the National Association of Insurance Commissioners Web site for links to your local commissioner's office and for phone numbers.
Shop around. If your insurance company gives you news you're not happy with, you can leave. There are dozens of choices out there, and with a little research, you will find a policy that suits you.
I'm not done making phone calls, but so far, I'm stuck.
Do I stay with a company whose practices I'm unhappy with -- simply because it will save me money? Well, yes. Absolutely yes. At least for now. Even with the finance charge, Liberty Mutual is still cheaper -- for me -- than its competitors. And as much as I'd rather do business with another company, it still comes down to dollars and cents.
There is, of course, one sure-fire way to beat finance charges: Pay your premiums in full, which is what I'm going to do. If that's prohibitive, your best insurance against the worst of such fees is a careful examination of your policies.
And a willingness to buy them from someone else.
Karin Price Mueller is the author of Online Money Management (Microsoft Press, 2001).