You have made the decision to buy a new insurance policy or add to your existing portfolio, which isn’t always the easiest of processes. One of the decisions you’ll now have to make, after finally deciding on how much coverage and what provider to place your business with, is when are you going to pay your insurance premiums.

Annual and monthly payments are the most common options that insurance policyholders choose. But which one is right for you and what are the differences associated with each method?

Choosing your payment schedule

The premium of an insurance policy is the cost of purchasing the policy. It’s what keeps your insurance policy active or “in force”, so that the insurer will pay the benefit to you selected beneficiaries, in the case of life insurance, you die.

As mentioned, annual and monthly premiums are what most people will decide between, but you can usually choose to pay premiums on a few different schedules:

• Annually – once a year
• Semi-annually – twice a year
• Quarterly – four times a year
• Monthly – twelve times a year

 

The amount you pay depends on how often you pay; you’ll pay the full premium in on payment if you pay annually, or you’ll have the premium cost divided by twelve if you pay monthly.

Simple enough, right?

But these choices aren’t there just for the heck of it. They can have a big impact on exactly how much you’re spending on your life insurance, and making the wrong choice for your situation could end up costing you big.

Paying premiums annually

Paying your life insurance premiums annually is almost always the cheapest option.

It costs more for the insurance company if a policyholder pays premiums monthly. First, they have to keep track of more premium payments to make sure a policy stays in force. This adds to administrative costs.

As with most companies, insurers aren’t just going to eat these costs. They pass them on to the policyholders. Paying an annual premium is a great way to cut down on policy costs, because insurers will almost always give a better rate for annual payments than monthly.

It also means the insurer have less money to deal with because they aren’t working with the entire premium amount. They would rather have $22,222 to work with right away than getting $2,000 every month, for example. Making it more enticing for people to pay more quickly benefits the insurer.

So how much can you save? Well the rule of thumb is that your monthly premium is 9% of the total annual premium. So the total saving each year will be about 8% of the total annual premium.

It’s also less of a hassle on your end to pay annually. You don’t have to worry about having the money throughout the year, making sure you pay your premiums (or taking the time to set up automatic payments). You pay once and it’s out of sight, out of mind for the entire year.

Paying premiums monthly

The argument for paying annually is appealing, right? But paying premiums on a monthly basis has its benefits, too.

1. You can spread the cost of the premium out over time. Sure, it’s nice to save 8%, but not everyone has the cash on hand to drop $20,000+ on a premium at one time. You might need to budget the cost out across every month (or quarter, or however often you feel comfortable paying). Having life insurance doesn’t matter if you can’t afford the premiums, so if spreading the cost out is what allows you to make the payments and have the coverage that you and your family need, a monthly plan is the right way to go.
2. You can do other stuff with that money. Maybe you can afford an annual payment…but you just don’t want to. You don’t like the idea with parting with so much money at once and you can invest the extra money, for instance. Pay your monthly premium and stick the rest of your would-be annual premium payment in a mutual fund. After all, if the cost difference is small, maybe you can beat it with interest.

Should I pay annually or monthly?

As with most financial situations, the answer to this question depends on your individual circumstances, but with all budgetary things being equal, your finances are in decent shape, you can spare the money, and so on, you should probably pay annually, because that will almost always be the most efficient way to spend your money.

One of the most important aspects of being fiscally responsible is to make sure your money isn’t working against you. That means avoiding things like unnecessary fees and cost increases. If there isn’t a penalty for paying monthly, then you can make your decision based on your available funds and what will make a bigger headache for you: paying a lot at once, or losing a bit throughout an entire year.

But if, as with most insurers, you’ll get a discount for paying annually, you should make that a priority. After all, you’re getting the same coverage. Why should you pay more for it?

Written by: Christopher Riddell

Group Pension & Insurance Advisor, Wise Riddell Financial Group

“Clarity precedes success”

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Direct 289-430-7255 | Toll-free 1-888-829-4994 | Office 905-829-4994 | Fax 905-829-5565

www.wiseriddell.ca 

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