Is There a Difference in How Often You Pay Your Premiums?
Changing how often you pay your premium could save you money (it may be a lot!). Almost always, you have a choice of whether to pay premiums monthly, quarterly, semi-annually, or annually. Insurance companies typically charge extra when you pay other than annually.
This is a factor applied to the annual premium to arrive at the premium if you elect to pay on a semiannual, quarterly, or monthly bank-draft basis. The mode premium factor for semi-annual premiums ranges from 51% to 53%, which means that you pay an extra 2% to 6% if you don’t pay the premium annually. The mode factor for quarterly premiums ranges from 26% to 30%, which means that you pay an extra 4% to 20% by paying quarterly. The mode factor on monthly bank draft premiums ranges from 8.66% to 9%, meaning that you pay an extra 3.92% to 8%. The reason the monthly bank-draft mode premium factor is more economical than the quarterly mode factor is because monthly bank-draft persistency is better than quarterly mode persistency – persistency means the percentage of policies that stay in-force and do not terminate/lapse. 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 dollars for the entire year. In addition, depending on the mode of payment selected, there is a higher probability that the policy will lapse.
However, that’s not the whole story. The actual charge is higher, as is illustrated by the calculation and usage of an “Annual Percentage Rate (APR)” as defined under the “Federal Truth In Lending” law. This calculation illustrates a higher percentage rate than shown in the para graph above. This is due to the fact that the policy owner does not have usage of the entire annual premium for the entire year.
You can judge whether you are willing to pay the extra cost by calculating the annual percentage rate (APR). Unfortunately, insurance companies are not required to disclose the APR, so you have to calcu late it yourself. You can produce a good approximation with one of the formulas below. The first is for monthly premiums, the second is for quarterly, and the third is for semi-annual.
For example, if the monthly premium is $95 and the annual premium is $1,000, the first of the formulas would produce an annual percentage rate of about 29.7 percent, and it would clearly be in your interest to pay it annually.
Enter your premium options below to see how much you can save by paying annually and the APR for paying semi-annually, quarterly or monthly bank draft:
The calculation is shown below; the factors are below the formulas.
3,600((12*$95)-$1,000) 3,600($1,140-$1,000) 3,600 ($140)
APR= ——————— = ——————- = ———– = 29.7%
(13*$1,000)+(42*$95) $13,000+$3,990 $16,990
Formulas for calculation of APR:
For monthly premiums: APR= 3,600(12M-A)/13A+42M
For quarterly premiums: APR= 1,200(4Q-A)/5A-2Q
For semi-annual premiums: APR= 200(2S-A)/A-S
M= Monthly Premium
Q= Quarterly Premium
S= Semi-Annual Premium
A= Annual Premium
The formulas and example are from The Insurance Forum, published by Dr. Belth and appeared in its April 1997 newsletter