YOU ASK:

How often should I choose to pay my life insurance premium?

WE ANSWER:

You can choose to pay your life insurance premiums monthly, quarterly, semi-annually or annually. It is strongly advisable that you opt for the annual premium payment as is doesn't incur any extra charges, whereas the rest of the payment options do.

Insurance companies benefit the most from annual payments, which is why they impose an extra carrying charge when premiums are paid other than annually. This extra carrying charge ranges from 2% to 6% in semi-annual payments, from 4% to 20% if you choose to pay quarterly, and from 4% to 8% if you pay monthly. From the above figures we can conclude that the quarterly option is the least economical.

However, the actual additional charge is usually much higher than the one announced by the insurers. Insurance companies use complicated formulas to calculate the annual percentage rate (APR) in order to arrive at the exact premium rates. Yet, they are not required by law to disclose the APR so you have to calculate it yourself to see how much extra you will have to pay if you choose to pay other than annually.

Let's say, for example, that your annual premium is $1,100 and your monthly premium is $100.

To calculate the APR, you can use the following sample formula:

APR_(mon) = 3,600*(12*M-A)/13*A+42*M, where the variable M stands for "monthly premium", and A denotes the annual premium.

The calculation goes as follows:
APR_(mon) = 3,600*(12*100-1,100)/13*1,100+42*100=19,46%.

Using the reference note¹, we can see that an annual percentage rate of 19,46% is considered fairly high, therefore the annual payment option is the better choice.

¹Note:
An APR between 5% and 10% is considered low.
An APR between 10% and 15% is considered moderate.
An APR between 15% and 20% is considered fairly high.
An APR between 20% and 25% is considered high.
An APR between 25% and 30% is considered very high.
An APR above 30% is considered extremely high.

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