Why do insurance companies charge a deposit?

Insurance companies charge a “deposit” because it lowers the risk for them and ensures you don’t file a claim without paying anything. Although this payment is sometimes called a deposit, it is typically just a percentage of your premium that you pay before your coverage begins.

No legitimate insurance company will offer you insurance coverage without having to pay anything up front. Unlike a typical deposit, this upfront payment is not an extra charge and it will only be refundable if you cancel your policy early. In some instances, there will be an extra charge on top of your first premium payment for administrative fees, which some insurers charge when you begin or renew your policy.

Why Insurance Companies Require Payment Up Front

• Reduces risk. If you have not paid for any insurance coverage, it would not be reasonable to expect an insurance company to reimburse you if you were to file a claim.

• Guarantees coverage. Once you have paid for a percentage of your premium up front, or the “deposit,” the insurance company knows that you will maintain coverage for at least that amount of time. You are also more likely to remain a customer moving forward.

• Demonstrates financial security. Paying a sum to the insurance company up front, typically the first month’s premium, lets your insurer know that you have the financial means to pay for your monthly premiums.

Every insurance company will charge you something before your policy is activated, but you can take steps to lower this upfront cost. You can start by comparing quotes from insurers that allow you to pay in monthly installments and that only charge you for the first month of coverage when you purchase your policy. Once you have found an insurer that meets this criteria, look for discounts you may be eligible for to lower your premiums even further.

To learn more, check out WalletHub’s picks for the car insurance companies with the cheapest down payment.