If Your Insurance Requires You To Use Automatic Bank Drafts, Read This


CheckEvery year I get 3-4 Customer Complaints.  I can count on the fact that 50-75% of them have to do with Automatic Bank Drafts, a.k.a. EFT.

In most cases, they do what they are required to do.  However, problems are most frequent when starting or ending an EFT.

Some people swear by them.  Others swear at them.  In this post I want to share some strategies that will help if you elect to use an Automatic Bank Draft to pay your insurance premium.

PREVENT EFT PROBLEMS

I work primarily with Baby Boomers.  Several of my clients still prefer to get a paper invoice in the mail so that they can mail a premium check.  Unfortunately, many insurance companies no longer offer that service for people who pay their premiums monthly.

The frequency in which you pay your premiums has a fancy term associated with it that insurance companies use.  If you hear your insurance agent refer to something called a, “MODE” he is using insurance jargon to sound intelligent.  Actually, all he is referring to is how often you have elected to pay premiums.

All insurance is calculated on an annual basis.  It used to be that you were required to pay the full annual premium once each year.  Over time, insurance has evolved.

Insurance premium is still based on annual premiums but as premiums have increased the insurance companies have learned that many Americans cannot afford to pay annually but they can afford the premiums if they are broken down into smaller segments.

If you are not comfortable with insurance companies setting up an automatic bank draft to your checking account, your only option may be to pay your premium on a quarterly (3 months at a time) basis.  Most insurance companies will allow still send you a paper bill if you elect that option.

SET-UP

One of the most common times for problems with EFTs to arise is when they are first set up.  It takes time for your insurance company to communicate with your bank and for your bank to program your checking account accordingly.

During that time your next premium will become due.  I have seen the bank take as long as 4 months to set up an automatic bank draft.

If that happens to you, be advised that when your automatic EFT if finalized at your bank, your insurance company will withdraw all of your back premiums at one time.

If you have kept good accounting records and have not spent the “extra” money that is in your account, you will not have any problems.

However, I have had many upset people call me after their bank account had 3-4 months worth of premiums drafted from it.  They had forgotten that their insurance premiums needed to be paid and felt like the extra money that was left in their account at the end of the month was a “windfall.”  They spent it.

When the EFT was finally complete and the insurance company took all their money, the client that spent the “extra money” had to deal with several bounced checks.

CLOSING

The other time that I have seen problems with EFTs is when a policy-holder tries to close the account.  They can be hard to cancel.

The individual I just spoke with tried to cancel a November draft that was scheduled for the 20th on November 5 with a phone call to her insurance company.  Under normal circumstances, that would work, however, there is a time-line that must be kept in mind.

In order to appreciate why you are taking a chance when you try to cancel an EFT through your insurance company, you need to know how automatic bank withdrawals work.

Your insurance company will notify your bank about your monthly draft 5-10 days before the actual draft.  Each insurance company has a different schedule.  If your telephone instructions to cancel the draft are received after they have already notified your bank to draft your account, there is nothing that they can do to stop it for the next draft.

Your account will be drafted again and you will need to get a refund directly from your insurance company if that is possible.  Sometimes they will refund your premium and sometimes they will not.

STRATEGIES

It is not always possible to avoid every problem with EFTs, however, there are a couple of strategies that you can use to minimize problems with these types of accounts.

  1. Set up a separate account just for EFTS.  Many banks offer free checking accounts.  If yours does, set up a separate account just for your automatic bank draft payments.  That way, your every day checking account will not be affected if there is a problem with the EFT.  Just remember, if you follow this strategy, you will need to deposit enough money into that account to cover any insurance premium drafts each month or run the risk of Non Sufficient Funds (NSF) bank fees.  (Hint:  If you elect to use this strategy, ask your bank if they offer an over-draft protection feature.  That way you will not lose your valuable insurance protection if you forget to transfer funds on a timely basis.)
  2. Cancel through your bank, if possible.  As I mentioned above, there may be a time in the future when you need to stop your bank draft.  If your bank allows you to, always cancel your draft through them or place a “Stop Payment” order on any drafts from the insurance company.  Your bank may charge you a service fee.  That will depend on your banks policies and the terms of your account.  However, a bank’s Stop Payment fee is generally much less than health insurance premiums.

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