Is There A Difference in How Often I Pay My Life Insurance Premiums?

Alexandra Belrose 0

Changing how often you pay your premium could save you money. It may be a lot in some cases. You almost always have a choice of whether to pay premiums monthly, quarterly, semi-annually, or annually. Insurance companies typically charge extra when you pay other than annually.

Mode Premium Factors

This is a factor applied to the annual premium to arrive at the premium if you elect to pay on a semiannual, quarterly, or monthly bank-draft basis. The mode premium factor for semi-annual premiums ranges from 51% to 53%, which means that you pay an extra 2% to 6% if you don’t pay the premium annually. The mode factor for quarterly premiums ranges from 26% to 30%, which means that you pay an extra 4% to 20% by paying quarterly. The mode factor on monthly bank draft premiums ranges from 8.66% to 9%, meaning that you pay an extra 3.92% to 8%. The reason the monthly bank-draft mode premium factor is more economical than the quarterly mode factor is because monthly bank-draft 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 dollars for the entire year. In addition, depending on the mode of payment selected, there is a higher probability that the policy will lapse.

The reason the monthly bank-draft mode premium factor is more economical than the quarterly mode factor is because monthly bank-draft 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 dollars for the entire year. In addition, depending on the mode of payment selected, there is a higher probability that the policy will lapse. Also, this is oftentimes a profit center for the company.

Calculating the APR

You can judge whether you are willing to pay the extra cost by calculating the annual percentage rate (APR). Unfortunately, insurance companies are not required to disclose the APR, so you have to calculate it yourself. You can produce a good approximation with one of the formulas below. The first is for monthly premiums, the second is for quarterly, and the third is for semi-annual.

For example, if the monthly premium is $95 and the annual premium is $1,000, the first of the formulas would produce an APR of about 29.7%, and it would clearly be in your interest to pay it annually. The calculation is shown below; the factors are below the formulas.

Sample calculation of APR—monthly premium is $95; annual premium is $1,000:

Where:

M = Monthly Premium Q = Quarterly Premium

S = Semi-Annual Premium A = Annual Premium

 

You can also use an interactive calculator here to perform the APR calculations.

It’s important to keep in mind that the premiums on universal life policies are designed to be flexible. As such, the policy owner has the option when of and when to pay. Therefore, the application of the APR concept may arguably not apply, as life insurance premiums are not a debt (loan). Please note that missing premium payments can cause a policy to lapse, especially when they are non-scheduled, less than scheduled, or the policy is underfunded.

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