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 that 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 underfunded.
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.
Steuer, author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, has more than 25 years of experience and holds the Department of Insurance Analyst License (LA) as well as the Charted Life Underwriter (CLU) designation. Tony holds various leadership positions and has authored three books on the topic of life insurance.
Steuer’s work has been awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy for his The Questions and Answers on Disability Insurance Workbook and The Questions and Answers on Insurance Planner. Forbes named Questions and Answers on Life Insurance: The Life Insurance Toolbook as one of their top nine great investment books.
He’s also the founder of the Insurance Literacy Institute and creator of The Insurance Bill of Rights designed to empower consumers and to identify members of the Insurance Industry dedicated to strong professional standards.