Car insurance policies are typically 6 months or 12 months in length. Why are 6 month auto insurance policies so popular? Why are many car insurance policies 6 months long? Should you choose a 6 month or 12 month policy?
Today, we’re answering any questions you might have about car insurance policies and why they’re 6 months long.
6 Month Versus 12 Month Policies: Which One Should You Choose?
We’ll cut right to the chase here: insurance companies typically offer 12 month auto insurance policies. However, some companies have begun to offer 6 month policies. In fact, some American insurance companies now only offer 6 month policies.
Typically, it’s in your best interest to purchase a 12 month auto insurance policy, and it’s rarely in your best interest to buy a 6 month policy. 12 month policy terms allow you to lock in a lower car insurance premium for a longer rate of time.
Insurance rates will generally rise over time, which is why it’s better to lock into a cheaper policy for a longer term today, as opposed to having your prices rise every 6 months.
Sometimes, you’re not able to purchase a 12 month policy. Some insurers only offer 6 month policies.
Why Some Insurers Only Offer 6 Month Policies
Several major American insurance companies no longer offer 12 month policies. State Farm and Allstate are two companies that only offer 6 month auto insurance policies.
There are two main reasons why some insurers only offer 6 month terms. Both reasons, as you may have guessed, are related to money:
Insurance Companies Can Change Policies More Frequently
Insurance is a unique business. Insurance companies won’t know if they’re making money until several years after they sell an insurance product. The insurance company sets rates, sells as many products as possible, then waits to collect data after a several year period to see if they charged enough to make a profit.
If insurance companies charge too little, then they’ll become unprofitable. If they charge too much, then they won’t sell as many products.
This is where a 6 month policy becomes valuable: let’s say an insurance company realizes they’re charging too little for car insurance. Instead of having to wait an entire year (a 12 month policy) to increase your rates, the company can change its rates every six months.
Let’s say a company is raising its policy rates by $5 every renewal term. A $5 difference may not seem like a lot to you. However, it could be $5 million in additional revenue when multiplied across one million insurance accounts held by the company. By renewing terms every 6 months instead of every 12 months, the insurance company is capturing more profit.
Individualized Pricing Controls
Insurance companies like to individualize pricing wherever possible. This creates less risk for insurers, while still allowing them to make adjustments.
Why would your insurance company need to individualize your policy? Well, the insurance company can’t change your rates midway through your policy – so they need to individualize your policy every 6 or 12 months, based on your policy length.
Let’s say you get a speeding ticket one week into your 12 month policy. Your insurance company can’t change your rates until nearly one year later. On a six month term, the company can “individualize” your rates earlier to reflect any changes.
12 Month Terms Are Typically Preferred
Insurance prices typically go up – not down. That means 12 month terms are usually the better option. You’re locked into a lower rate for a long period of time.
Unfortunately, a growing number of American insurers have begun moving away from 12 month insurance terms. Some insurers now only offer 6 month terms. Other insurers may offer both – but the longer, more preferred terms are only available to trusted, long-term customers.
When possible, pick the 12 month policy. 6 month policies typically only benefit the bottom line of the insurance agency.