Insurance Default: Why is it a problem?

A business is truly good when the accounts close for everyone involved. This is why many companies find default to be a major source of risk and concern, as a prolonged or general lack of payment can represent the end of the enterprise.

In the insurance sector, where doing the calculations correctly is vital like no other, it couldn’t be any different. Companies take precautions in contracts and seek to guarantee, often even in court, the amount that was not paid.

However, there is a consensus that most people do not default because they want to, especially when it comes to products that guarantee the protection of their life, health and property.

Typically, what occurs is a localized difficulty which, added to the lack of knowledge of the terms of the contract, ends up generating a huge headache for the insurer and the user.

In this post, we will give you some important tips to avoid being considered in default or, if this happens, what the consequences are and what measures you can take. Follow along!

What happens when the insurance is not paid?

To understand the consequences of not paying your insurance, you need to take into account two variables: the type of contract and when the monthly payments stopped being paid.

By type, we refer to the object and type of your insurance. Car insurance , for example , deals with non-payment differently than life or cargo insurance. When what you contract is protection for a specific period of time, when you stop paying your monthly payments, this means that this period will be reduced proportionally.

However, when taking out insurance for a specific service or situation, such as cargo transportation, if you do not pay, in addition to losing coverage, other consequences may occur, such as registration with credit protection bodies.

Carefully evaluate your contract and know for sure which case the insurance you have contracted fits into. This way, in the event of a default, you will have knowledge of what could happen and how to deal with the situation.

Default in the first installment

The initial installment of your contract has a particular condition in the insurance contracting process: it is its payment that officially begins the commercial relationship. Therefore, if this first monthly payment is not paid within the stipulated period, the proposal is rejected and the protection does not even begin to exist.

Therefore, it has become market practice for this installment to be settled as soon as the contract is concluded, so that the process can continue normally and protection can begin within the negotiated period.

In car and other property insurance, failure to pay the first installment can ruin everything, as it returns the process to square one. In other words, to confirm the protection agreement, a new negotiation, re-doing inspections and other steps are necessary.

Therefore, neglecting this first payment, in addition to leaving the object to be insured unprotected, may result in the loss of advantageous financial conditions and time. In these cases, there is no possibility of reimbursement.

Failure to pay the second installment onwards

Delays that occur from the second installment onwards are handled differently. In these cases, the contract provides for an automatic period for payment, with interest being charged, or even negotiation, in accordance with each insurer’s policy.

In most cases, failure to make this payment results in cancellation without refund of amounts previously paid. Eventually, contracts for some types of insurance imply charges for late payments and interest.

In any of these situations, it is mandatory for the insurance company to notify the customer of the existence of the delay and what measures are necessary to settle it.

How to Avoid Default in Insurance?

The obvious answer would be “keep your payments up to date”, but that’s an understatement. The truth is that, to avoid problems with paying off your insurance, the ideal is for the user to be organized and take precautions before the situation becomes uncontrollable, through  financial planning .

In some situations, when payment is made by direct debit or credit card, there may be a problem in the payment process. Changing cards — due to loss or misplacement — or insufficient account limits can lead to a default situation that goes unnoticed by the insured and harms their insurance coverage.

If the issue is specific and temporary, as in this example, quickly request the reactivation of coverage and a new payment condition.

However, it may happen that your situation is chronic and defaults tend to increase. In this case, the best option is to look for a broker and negotiate. There may be more affordable plans or, even if it is really impossible to maintain the agreement, it is better to end the contract through negotiation rather than due to lack of payment. In the latter case, you lose coverage anyway and still have the debt.

Stopping paying as a way of renouncing insurance also has another implication: eventually, you could be entitled to some compensation, but this only happens if the cancellation is made officially.

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