- Is it less expensive to pay life insurance premiums monthly?
- July 30, 2013
When it comes to a life insurance premium, you have the choice of whether to pay your premium on a monthly, quarterly, semi-annually, or annually basis. Changing how often you pay premium could save you a lot of money.
Most insurance companies will typically charge extra when you pay anything other than annually. This is a factor applied to the annual premium to arrive at the premium, if you elect to pay on a semi-annual, quarterly, or monthly bank-draft basis.
The mode premium factor for semi-annual premiums ranges from 51 percent to 52 percent, which means you pay an extra 2 percent to 6 percent.
The mode premium factor for quarterly premiums ranges from 26 percent to 30 percent, which means you pay an extra 4 percent to 20 percent by paying quarterly.
The mode premium factor for monthly bank draft premiums ranges from 8.66 percent to 9 percent, which means you pay an extra 3.92 percent and 8 percent.
The reason the monthly bank-draft mode premium factor is more economical than the quarterly mode factor is because monthly bank drafts persistency is better than quarterly mode persistency.
Companies charge these mode premium factors because when premiums are paid more often than annually, the company does not have the use of the premium for the entire year. In addition, depending on the mode of payment selected, there is a higher probability that the policy will lapse.
You can judge whether you are willing to pay the extra cost by calculating the annual percentage rate (APR), which is, unfortunately, not required to be disclosed by insurance companies. Meaning, you may have to do it yourself. A tool to produce a good approximation can be found here.
It’s important to keep in mind that the premiums on universal life policies are designed to be flexible. As such, the policyholder has the option of when to pay. Then, the application of the APR concept may arguably not apply, as life insurance premiums are not a debt (loan).
Keep in mind that missing premium payments can cause a policy to lapse, especially when they are non-scheduled, less than scheduled, or the policy is under funded.
There has been some litigation in this area as to whether companies should disclose annual percentage rates (APRs). There are a few companies who have settled suits in this area and have added calculators to their websites.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.