Should You Pay Your Life Insurance Premiums Annually or Monthly?

by Kerri-Lynn McAllister June 22, 2016 / No Comments

You can usually pay your life insurance premiums either monthly or annually. How often you pay is up to you. What’s better?

Monthly is easier for budgeting

Monthly premiums are deducted automatically, which is convenient and makes budgeting easier. You won’t miss a payment if you have enough money in your bank account.

Since life insurance premiums are often guaranteed, you don’t need to worry about the amount changing from what your policy contract shows.

Annually saves you money

With term life, term 100, and whole life insurance, the monthly premium is rarely the annual premium divided by 12. Instead, the annual premium is often multiplied by 0.09. For example, if your annual premium is $1,000, your monthly premium would be $90 or $1,080 a year. You’ll pay 8% more just for the convenience of making monthly payments.

With universal life insurance, the monthly premium is usually the annual premium divided by 12. Paying annually still has advantages because investment growth is tax-sheltered. Making more deposits sooner allows more growth. This is the same reason that contributing to your RRSP at the beginning of the year is better than making smaller monthly contributions or a lump sum at the end of the year.

The drawback of annual payments

If you pay your premiums annually, the bill may arrive at an inopportune time. You may be facing unexpected expenses or forget because you’re away on an extended vacation.

Since you make the payment manually, there’s the hassle of having to write and send a cheque. Each time you receive the bill, you’ll probably think about whether you want to continue or cancel your insurance.

Switching

You usually have the option of switching your payment frequency (premium mode) between annual and monthly on your policy anniversary. You may be able to pay your premiums quarterly or semi-annually instead.

Can you pay by credit card?

If you’d like to collect points and are hoping to pay your life insurance premiums with a rewards credit card, you’ll probably be disappointed. Payments are almost always made by:

  • monthly pre-authorized withdrawals from your bank account, or
  • annually by cheque (after you receive an annual bill)

Since credit card processing costs more, your premiums would need to increase. That penalizes people who pay by cheque. But products with simplified underwriting (insurance without a medical exam) cost more and have margins that may allow payment by credit card.

The bottom line

The real issue about paying your life insurance premiums isn’t about frequency but making sure you pay them on time. Otherwise, there’s a possibility you could lose your coverage.

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Flickr: KMR Photography