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The consequences of late car insurance payments

It's a week until payday. You're running short of money, so you put your car insurance bill in the "this will have to wait" pile. If you believe you're paying too much for auto insurance now, wait until you see the consequences for your late payment.

Even if you're only a day late with your premium payment, your insurance company likely has the right to cancel your policy. Also, the company won't necessarily reinstate you once it gets your overdue money. Furthermore, once your affordable car insurance policy has been canceled, you may find yourself paying more money for a comparable policy or — worse yet — having trouble finding car insurance at all.

Can they do that?

Cancellation of car insuranceEach state has rules governing when an insurance company may drop your policy.

An insurance company will almost always be able to cancel your policy in the middle of its term — as opposed to not renewing it when it expires — if you fail to make a payment on time. Furthermore, on-time payment usually means your premium must be received by the due date. Dropping the payment in the mail by the due date isn't good enough.

Most auto insurers value your business and won't drop you if you're a few days late. Some companies, however, may seize the opportunity to kick you off their rolls if you're habitually late with payments or if they decide that you're a risk they no longer wish to insure. If you've passed the cancellation date, an insurer may require that you pay the remaining balance due for the full term before they reinstate your insurance.

No grace period for car insurance

Many drivers mistakenly believe that there is a grace period for paying car insurance premiums. While many health and life insurance policies afford a grace period of 30 days — and state law sometimes mandates those grace periods (in New York, you have 31 days) — auto insurance usually doesn't work that way. If you're late in paying your car insurance premium, you're at the mercy of your insurance company. State insurance laws will, however, prescribe the number of days' notice that you're entitled to before the cancellation takes effect. But that's little consolation when you're on the verge of losing insurance.

Many drivers mistakenly believe that there is a grace period for paying car insurance premiums.

You may have gotten away with paying your auto insurance a few days late in the past, but don't count on your auto insurer being understanding forever. In many cases, the person canceled will complain to the state insurance department, arguing that the insurer always accepted late payments in the past. Although state insurance regulators are able to resolve many complaints, they may not be able to help someone who fails to pay premiums in a timely manner.

Shopping for new insurance isn't easy if you've been canceled

When you apply for a policy with a new insurance company, it will check to see if you've been canceled for nonpayment of premiums with your former insurer. If that's your case, it may not want to insure you — even if your driving record is spotless. Or it may not allow you to purchase insurance through an installment plan, insisting on one annual payment instead. Many insurance companies also take credit history into account when setting their prices. Their underwriters believe that people with bad credit are more likely to become involved in accidents. (Credit scoring, as it's called, has been criticized as being discriminatory to the poor and minorities, but most states allow it.)

In a worst-case scenario, you may find that you'll have to buy auto insurance from a "nonstandard" or high-risk carrier. These companies accept "less-desirable risk" clients (usually with tarnished driving records). You'll always fare better if you can find coverage in the preferred or standard market. Drivers classified in the preferred category pay the lowest premiums. On the other hand, if your driving record isn't perfect and you're viewed as a bad credit risk, your only option may be your state's last-resort auto insurance program (often called the assigned risk plan).  For more, see Swimming in the assigned-risk pool for car insurance.

Bite the bullet and tell the truth

When you apply for a policy from a different company, you should answer truthfully about why your previous policy was canceled. In many states, an insurance company has 60 days after it issues your policy to investigate whether you've told the truth. If you've fibbed on your application and the insurer finds out, your policy can be canceled.

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