The deposit premium is refundable if the contract is cancelled by either party, but, generally, no interest is paid on it. Historically, perpetual insurance was first introduced in Philadelphia, in the year 1752 and has since been used in many domains. Today, it is still used mainly in fire insurance.
A first and obvious advantage of perpetual insurance contracts is the convenience. Typically, although the deposit premium can be quite high (usually ten times a typical yearly premium for a regular insurance policy), consider that perpetual insurance policies can be cancelled by any time and the premium will be refunded. This makes such insurance ideal should the homeowner decide on an extended holiday or perhaps in cases where he is most of the time on the road. Canceling the policy upon return or on changing jobs is no longer a problem, not being bound in contracts with specific terms and penalties (such as actual money payments or, least severe, a low or no insurance sum). Also, a very important thing to take into consideration is that, in such situations, the homeowner actually benefits from the extra funds available to him right away, consisting of the deposit premium (and, if lucky, interest for it as well).
Not only that, but perpetual insurance contracts are now being treated with care regarding taxes. In the US, for instance, most of the states offer great tax exemptions for this type of insurance. The only big disadvantage for this type of insurance is the initial deposit premium. Since it is sometimes large, people might not be willing to invest, and go for regular homeowner’s insurance. On the short term, they save some money, but on the long term, not to mention the possibility of canceling anytime, perpetual insurance saves the insurance premium and yields no further costs to the insured.
Over time, although the terms of perpetual insurance have stayed the same during the years, it is possible that the insurance coverage changes, as a result of deprecated materials, old buildings, lack of workforce and many other economic factors. Although a small risk, it is something that the homeowner will need to keep in mind when signing the contract.
In the event of bankruptcy of the insurance company, things aren’t looking in any way worse than regular insurance. In fact, in regular insurance, there is little chance for the insured to actually recover any money, because he is not a direct preemptive creditor of the insurance company. That means that the insured will be placed on a level lower than all of its major creditors and will only get the chance of getting any refunds after them. Typically, that never happens, since not having enough funds to pay the main creditors is, most of the times, the actual reason for bankruptcy.
On the other hand, since the deposit premium is a credit in its own right, in case of perpetual insurance, the insured is far more likely to receive a refund in case of bankruptcy, simply by being placed higher in the order of creditors.
All in all, if you are one of those persons who don’t mind a deposit, but desire confidence and convenience, perpetual insurance might turn out to be the right option. If you are shopping for insurance, do remember to ask whether such an option is available to you. If you can negotiate the contract clauses to your liking, you might end up saving a lot of money. |
