By and large, if you have an insurance policy, it's going to last 6 months long. Some states and companies offer a 12 month policy, but the average for insurance companies is 6 months in duration. There are many reasons as to why insurance companies chose to underwrite their policies this way— some that benefit you and some that are more in line with the insurance company. Let’s get to it.
From the insurance company’s perspective
The driving theme of insurance companies is the idea of anticipating and predicting risk. Insurance companies look at each individual client and determine their rate based on how much risk they pose to the insurance companies. Typically, this risk is calculated over a 6 month period of time— what your insurance company calls your policy period. During this 6 month time frame, any infraction like an accident or ticket will not affect your premium until the following billing cycle. Because of this, insurance companies like to use 6 month policy periods as a way to recalculate your rate to readjust for accidents or citations you have had more often. Simplistically, a shorter policy cycle allows for insurance companies to better calculate your rate. Moreover, drivers who were previously without insurance coverage are seen as less risky after being insured for just 6 months. This allows insurance companies to offer more competitive rates because of the decrease in risk associated with new customers that were previously insured.
From your perspective
From your perspective, a 6 month policy can benefit you in a couple of ways. Like your insurance company, you can benefit from a faster recalculation of your rate. While it varies by state and citation, most insurance companies will continue to charge you for up to 3 years for a driving infractions (citations, accidents, etc.). If you have an accident or citation on your record that is set to expire half way through your 6 month policy, most insurance companies won’t readjust your rate until the policy period has passed. In this regard, a shorter 6 month policy will allow any infractions to your insurance record to be removed faster.
A shorter 6 month policy also allows you some flexibility with insurance companies. If you’re unhappy with your company but don’t want to cancel mid-policy, you have the bonus of non-renewing at the end of your term and looking some place else. And, if you were previously uninsured, most insurance companies offer significant discounts for drivers who maintain a policy for just 6 months. Once the first 6 months is over, shopping around for a new policy should qualify drivers for much lower rates.
What about 12 month policies?
While 12 month policies are less common than 6 month policies, it is dependent on your company and your state if you can get one. If a 12 month policy is available, there are some things you should consider before agreeing to a policy period that long.
With a 12 month policy term, your rate is locked in for a year. Which, if you’re not being rated for an accident or citation, is an effective way to ensure that for at least 12 months, your rate won’t change due to a rate revision. In this sense, a rate revision refers to when your insurance company raises (or lowers) your rates due to the number and severity of claims in your area. In many cases, a rate revision can affect drivers regardless if they have filed a claim. Overall, car insurance rates rose by 10.8% nationally between 2011 and 2016. So, having a rate locked in for 12 months might be financially beneficial to you.
While the cost of car insurance usually increases year-over-year, there are instances of it decreasing. For example, in Massachusetts
, rates in 2016 were 20% lower than they were in 2011. If you’re locked into a yearlong premium, it might take you a long time to see these savings.
6 month policies are the norms for insurance companies and the shortest most companies will offer— not including canceling your policy mid-term. Most companies use them because it’s an easy way to recalculate rates to ensure you’re being rated fairly as well as being a simple duration of time. However, if a 12 month policy is available to you, you should consider if you would personally benefit from having your rate locked in for a longer period of time. This consideration depends on whether or not you’re being rated for a driving infraction, and if your area is known for insurance rate volatility.