Tip: Saving on Insurance Costs - Pay Premiums Annually

For those with good money discipline you can save a bit on insurance by paying your premiums annually. I do this with my homeowners, auto, and life insurance. In all cases it costs me less. I have a "Bills Escrow" savings account in which I transfer money monthly for annual (and other irregular) expenses.

Example: My Life Insurance -- I have the option to pay $12.85 per month or $146.00 per year. $146 works out to be around $12.17 per month. The difference between the two is not large ($8.20 annually) but it costs me 5.62% less over the 1 year span. I have a 20 year term life policy so over 20 years that saves me $164 which essentially means the 20th year is "free" versus the monthly payment.

Also while the money sits in my "Bills Escrow" online savings account I earn interest. This is a double win since not only am I paying less for my insurance but earning interest while the money sits there on top! I simply take my annual premium and divide it by 12. I transfer that amount each month into the savings account. When the bill comes I transfer the amount I need back and pay it. Simple!

I looked into my other insurance premiums and I found that by paying them annually I save roughly 5% of those premiums by paying annually. This adds up fast on more expensive insurance. Everyone can do this with some planning. To start today you simply call up the insurance company and ask them to switch you to annual payment plans. In most cases you have to pay the difference between now and the next bill immediately.

The next step is to open a "Bills Escrow" savings account (I use ING Direct) and start the monthly transfers to the  account. I like to do separate transfers for each insurance policy for budgeting and ease of tracking. The only slightly tricky part is figuring out the initial deposit. You have to deposit the total amount you should have saved by now on a yearly plan.

Example: Your car insurance is $1200 per year if you pay yearly. You are currently on a monthly payment plan. Let's say you originally got your insurance in June. Most insurance companies will make annual payments due on your policy's anniversary. It is now September. If you switch to an annual plan today you will have to pay ~$900 to the insurance company now (to pay off the rest of this year for the insurance). Now you need to calculate your "back payments" to put into the savings account.

June through September is 3 months. That means you should have $300 in your savings account today. This is your initial deposit for your auto insurance. Starting in October you will set up a transfer of $100 per month to the savings account. By next June (9 months from now) you will have the $1200 you need to pay the annual premium again (plus interest!).

Some numbers: Let's say the total of all the insurance premiums on a monthly plan add up to be $3,000 per year. If switching to an annual payment saves you an average of 5% then you have $150 more per year (plus the interest you earn on the savings account!) to work with. The more expensive insurance you carry the more you win! This will take you a couple of hours to calculate and set up. Great return on investment!