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.
Semi-annual premium mode factor ranges from 51 percent to 52 percent, which means you pay an extra 2 percent to 6 percent.
Quarterly premium mode factor ranges from 26 percent to 30 percent, which means you pay an extra 4 percent to 20 percent by paying quarterly.
Monthly premium mode factor ranges from 8.66 percent to 9 percent, which means you pay an extra 3.92 percent and 8 percent.
Monthly bank draft mode premium factor is more economical than the quarterly mode factor because the monthly mode 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, monthly or otherwise, 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.
Tony Steuer is an author and advocate for financial preparedness. Tony Steuer, CLU, LA, CPFFE, helps people make sense of the financial world in a way that’s easy for them to understand. His books including, “GET READY!,” “Insurance Made Easy,” and “Questions and Answers on Life Insurance,” have won numerous awards. Tony is the founder of the GET READY! Initiative which includes the GET READY! financial organization system, the GET READY! Financial Preparedness Club, GET READY! Podcast, and the GET READY! Financial Principles, a best practices playbook for the financial services industry. Tony served as long-term member of the California Department of Insurance Curriculum Board. Tony is regularly featured in the media including the New York Times, the Washington Post, Fast Company, and other media. He has also appeared as a guest on television shows, such as ABC’s “Seven on Your Side.” Visit https://tonysteuer.com/ to join the GET READY! Financial Preparedness Club and access free resources.