What your insurer must do if you can't pay

If you cannot keep up with insurance premiums, the first thing to know is that your insurer or its finance provider has rules to follow. The Financial Conduct Authority's banking conduct rules say a firm should act to deliver good outcomes for a banking customer whom it has reason to believe is in financial difficulty¹. That duty sits alongside the insurer's own right to end a contract if your circumstances change in a way that significantly alters the risk².

What happens next depends on how you pay. If you pay the insurer directly, missing a payment usually triggers a reminder and a deadline. If you pay monthly through a premium finance arrangement, the debt is owed to the finance provider, not the insurer, and that changes who you deal with and what happens to your cover³.

Paying monthly rather than annually pushes the average cost of motor insurance up by 10%⁴. That extra cost is one reason insurance is part of what campaigners call the poverty premium: people on lower incomes are charged more for paying for things like insurance each month rather than all in one go for the year⁵.

What counts as financial difficulty with insurance premiums

Insurers consider a variety of factors when calculating the premium for the policy they are offering. It can vary depending on the insurer, the individual circumstances of the policyholder and the particular risk or risks the insurer is being asked to cover⁹. That means two people with the same cover can pay very different amounts, and a change in circumstances can push a premium beyond what someone can afford.

Financial difficulty with insurance is not a single event. It can mean you have missed a payment, you are worried about an upcoming one, or you are choosing between insurance and other essentials. The FCA's banking conduct rules describe a customer the firm has reason to believe is in financial difficulty, which puts the onus on the firm to recognise the signs and respond¹.

Health plays a part in what you pay. Health insurance premiums reflect how likely it is in general terms that someone will need to make a claim, and whether the person taking out a policy is a bigger or smaller risk than the average policyholder, informed by medical history¹⁰. Life insurance works similarly: any significant pre-existing medical or other health conditions that increase the risk of you dying early will also increase premiums¹¹.

If you have a condition you must tell an insurance company about any conditions you have before buying a policy¹². Being honest at the start protects you later: for existing life insurance policyholders diagnosed with cancer, the policy cannot be cancelled as long as you make full and honest disclosures on your application and continue paying the premiums¹³.

What your insurer should offer if you can't pay

The rules do not set out a fixed menu of options, but they do require firms to treat customers in financial difficulty fairly. The FCA's banking conduct rules say a firm should act to deliver good outcomes for a banking customer whom it has reason to believe is in financial difficulty¹. In practice, that means an insurer or finance provider should contact you, explain what is happening and consider what it can offer.

Some policies include features that help when money is tight. Mortgage payment protection insurance can cover payments if you cannot pay for certain reasons, for example if you are sick or made redundant¹⁴. Home emergency insurance might also provide alternative accommodation while a problem is being fixed if your home is unsafe or uninhabitable¹⁵.

If you are in serious financial difficulty, formal solutions exist. A Debt Relief Order in Northern Ireland requires that you must be unable to pay your debts¹⁶. Bankruptcy has a specific effect on insurance: you may be given a short time to pay off the instalments for the rest of the year, and the policy is cancelled if you do not do this³.

Paying monthly: how premium finance changes the picture

When you pay monthly, you are usually borrowing to spread the cost. The finance provider pays the insurer in full, and you repay the finance provider with interest. That is why paying monthly rather than annually pushes the average cost of motor insurance up by 10%⁴.

The FCA's own analysis shows that customers are paying more for their car insurance due to risks outside of their control and if they pay in monthly instalments via premium finance¹⁷. Others are charged more for paying for things like insurance each month rather than all in one go for the year⁵.

The key difference is who you owe. With premium finance, a missed payment is a debt to the finance provider. That provider can cancel the policy, and the outstanding balance remains owed. If your car is written off, a total loss claim does not cancel the remaining monthly payments; the policy usually ends once the claim is settled but the outstanding balance remains owed¹⁸.

Some premiums are reviewable. With reviewable premiums, the insurer has the right to periodically review your premiums and may opt to increase them, based on the insurer's financial position and expectation of paying future claims¹⁹. Family income benefit insurance offers guaranteed premiums, fixed for the whole term, or reviewable premiums, which are lower initially but may be increased on regular review²⁰.

Before you cancel a policy you still need

Cancelling cover you still need is rarely the right first step. If you are replacing a life insurance policy, never cancel it until the new policy is in place¹⁹. That is because a new policy may not cover the same conditions, or may cost more.

If you have a life insurance policy and your health changes, the existing policy may be more valuable than you realise. For existing life insurance policyholders diagnosed with cancer, the policy cannot be cancelled as long as you make full and honest disclosures on your application and continue paying the premiums¹³. Insurers can refuse cover where the medical prognosis is that you will die during the policy term, because insurers cannot cover certainties²¹.

If you cancel car insurance but keep the car, you still need cover to drive it legally. You can cancel your policy and set up a new one with a different insurer whenever you want, even if a claim is ongoing, but the claim will affect your no-claims bonus²². If your car is written off and you want to keep it, the insurance company will give you an insurance payout and sell the vehicle back to you for category N or S vehicles²³.

A full year of no-claims bonus should not be awarded if the customer has not completed the whole year on the policy, for example a 12 month policy cancelled after 11 months²².

Where to get free help with insurance costs

Free help exists and you do not have to pay for it. MoneyHelper offers free, impartial money and pension guidance, backed by government⁸. There are free advice services that can help with debt²⁴. Independent Age runs a free helpline²⁵.

If you are dealing with a mortgage or secured debt alongside insurance costs, help is available. Court duty advisers provide free legal help at the court²⁶. Help to Buy Wales says that when an account falls into arrears and the customer is experiencing financial difficulties, it will refer them to a source of free and independent debt advice²⁷.

New rules on buy now, pay later require lenders to contact you, show you where you can get free debt advice, and consider giving longer to repay or removing extra fees²⁸. Those principles of forbearance apply across consumer credit.

If you have already missed payments, any help you receive will impact your credit file²⁹. Failing to pay debts, whether secured or unsecured, can affect your credit rating⁶. Any payment you miss during forbearance is recorded on your credit file and could make it harder to get credit in the future³⁰.

Complaining about how your insurer treated you

If you have a complaint about an insurance company or claim, the Financial Ombudsman Service can help⁷. Talk to your insurance provider first as they need to have the chance to put things right³¹. If you are not satisfied with their response, you can take your complaint to the Financial Ombudsman³².

The Ombudsman can ask the insurer to reconsider, or pay, some or all of your claim, or refund your premiums. It may also ask the insurer to pay you interest, or to pay you compensation if you have been caused distress or inconvenience³³. Where a lender has not done enough to help, the Ombudsman may tell them to pay compensation for any distress or inconvenience³⁴.

Your client can bring their complaint directly to the Ombudsman or ask someone to talk to them on their behalf³⁵. The policy summary for pure protection contracts must state that complaints may subsequently be referred to the Financial Ombudsman Service or other applicable named complaints scheme³⁶.

If you are struggling with insurance costs, the first step is to talk to your insurer or finance provider before you cancel anything. Free, impartial help is available from MoneyHelper and debt advice charities, and the Financial Ombudsman Service can step in if you are not treated fairly.