Should I pay for my insurance policy on a monthly or yearly basis?

After taking a short break from Education Series, I am back to demystifying insurance. This time it is to help you decide the premium payment mode for the next life insurance contract you intend to buy. Typically, all life insurance products have an option to choose from one of the four premium payment modes; monthly, quarterly, half-yearly and annually. While one of the crucial factors to decide the mode is the availability of funds. Hence, one might go for the monthly premium payment mode if the annual premiums are onerous. And that’s perfectly fine. This is precisely why insurers offer a range of options. One size doesn’t fit all!

Let’s assume that you have funds to pay annual premiums and have the luxury to choose between any one of the modes. In this scenario, which mode you should choose and why? You are in luck; this article gives you ammunition to make the decision!

A quick look at the Benefit Illustration or a Policy Contract would tell you that for a given contract annual premiums are lesser than monthly premiums when combined for the year. Mathematically speaking, Annual Premium < Monthly Premiums X 12. Put simply, when you choose monthly premium payment mode you end up paying more in the absolute terms when compared to paying annual premiums. This is best understood with the help of an example

For the rest of the article, let’s work on an endowment insurance policy with following specifications

· Annual Premium — SGD 100,000

· Premium Term — 25 years

· Policy Term — 25 years

· Guaranteed Maturity Benefit -SGD 1,480,200

· Non-Guaranteed Maturity Benefit -SGD 2,049,000

Like any other insurance policy, this policy also has an option to choose from a range of premium payment modes. Following table identifies the premiums for each mode and also quantifies the extra premium one pays for non-annual premium payment modes

Effectively, in case of monthly premium payment mode, one ends up paying as much as one additional one year’s premium for a 25-year contract! However, the Maturity Benefit is same regardless of the premium payment mode. Clearly, this results in depletion in the value. In the market like Singapore, loss of yield could be as much as 0.2%-0.4%, which could be huge for policies with longer duration. In this particular example, it translates into a loss of SGD 110,000!

fidentiaX understands the mechanics of the insurance contracts and is committed to providing superior returns to the investors. Hence, when fidentiaX processes the contract from the seller to the buyer, we convert all the non-annual premium payment policies to annual premium payment policies. This ensures the investors who buy from the fidentiaX Marketplace get superior returns. This is just one aspect of “cleaning-up” we do to enhance value. Curious to know the other aspects? Watch out for the next article!

Disclaimer: The intention of the article is to educate. The premiums and benefit amounts are fabricated but realistic. The author appreciates that insurers are right in charging extra-premiums for modes other than annual premium payment mode to cover for lost investment income and additional administrative expenses.

About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with focus on modelling of life and health products, peer review and business analysis.