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Why do policies last only six months?


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Question: Why are most car insurance policies only six months in length?

Answer:  In general, most car insurance companies offer policies that last only six months, instead of 12, because insurers don’t want to wait a full year to re-evaluate their policyholders. 

When you purchase a car insurance policy, you transfer risk from yourself to the insurance company.  Thus, your car insurance provider wants to know if the risk you pose has increased in the six-month interval since it last looked at your data and ran its numbers on you and your insured vehicle.

Basically, insurers want the flexibility to adjust rates without waiting a full year.

We like to think it gives you the opportunity to shop around and save money more frequently, too.

Driver profiles change

A lot can change within a year, or even a half year.  You may have started a new job, moved, gotten married, gotten divorced, had a teen start to drive, had a child move out, had an accident or changed cars. 

Any one of these changes could possibly affect your driver profile with your car insurance company and thus its risk assessment of you.  With a short policy period, your car insurance company is more up-to-date on your current situation. 

Once your current risk is assessed at your renewal period, your car insurance carrier knows if it wants to extend a renewal offer to you or wants to send you a non-renewal notice instead.

If your risk has increased -- for instance, you now have a teen driver in your family or have received a traffic violation in the last six months -- then it’s likely your rates will go up.  If you’ve had three accidents in the last six months, your policy may be non-renewed.

A six-month policy can also work in your favor.

For example, if a ticket or accident has just dropped off your driving history, then your car insurance rates will likely be reduced at your renewal period.  Or, if you retired and are driving a lot less, calling the insurance company to let it know should lower your car insurance premiums on the next bill.

Statewide rate changes

Besides your rating and risk factors, premiums for car insurance can change due to your car insurance company filing different rates with the state.  It may be a decrease in rates, but more likely it’s an increase.

Rates can be revised with the state due to more (or less) claims in the few years, higher (or lower) repair costs, and other variables that cause an insurer to need to raise (or reduce) rates across the board to all policyholders. 

If your policy only renewed once a year, your insurer would have to wait to change your rates.  Car insurance companies prefer for any such rate adjustments to happen sooner rather than later.

Other reason for six-month policies

Having policies last only six months also helps car insurance providers better defend against fraud.  By re-checking the various data that an insurer pulls on drivers every six months, it is easier to nip in the bud misrepresentation or other forms of insurance fraud before it blossoms into a bigger issue that costs the car insurance company money.

Also, state laws regarding non-renewals are more lenient than mid-term cancellations.  So if you have become a bigger risk in a short period of time, the insurer would rather be able to not renew your business at the six-month period instead of carrying you for a full year.

12-month policies do exist

Some companies offer just 12-month policies allowing policyholders to lock in their rates. Others offer both six- and 12-month policies, but in many cases you must be found eligible for the 12-month policy to have it offered.

With these types of companies, 12-month policies are typically offered only to preferred drivers – meaning drivers who have good credit, don’t have accidents or tickets and carry higher insurance limits.  This is because insurers are more comfortable with pulling the driving record, and other reports, only once a year on these motorists.

With either a six- or 12-month policy, the way to find the best car insurance rates is to comparison shop at the end of the policy period.  See if your current insurer is offering the most affordable rates around, or if it’s time to change to a new insurer offering better rates and service.

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