Give yourself the annual premium advantage

Khyati Dharamsi/ DNA MONEY
Have you ever wondered how much you can save by just choosing the right mode of premium payment on your life insurance policy?

Most life insurance companies add an extra cost to your premium if you pay in instalments rather than in one single shot during the year. So, the premium under the annual premium option in a policy would be less than those under semi-annual, quarterly or monthly options.

This is true for all life insurance policies other than unit linked insurance plans (ULIPs). All traditional insurance plans including term assurance, endowment, money back and whole life policies would charge a higher premium for the monthly mode and lower for a yearly mode.

Let us take the example of Life Insurance Corporation's endowment plan, Jeevan Anand. The yearly premium for the policy for a certain age profile and policy term turns out to be Rs 5,461.

However, if the same person opts for the semi-annual option, it is higher up at Rs 5,546 (Rs 2,773 x 2 payments in a year). As the frequency of payment reduces from yearly to monthly, the premium tends to increase.

Under the monthly mode, the policyholder would be paying 8.33% higher than what a yearly premium payer would pay for the same policy, even though he has opted for the same term and sum assured, and belongs to the same age group.

But, why do insurance companies make this differential charge? It is not because the insurance company will earn an interest on all the money that you have paid at the start of the policy year rather than in a small quantum throughout the year.

Rahul Aggarwal, chief executive officer of Optima Risk Management Services explains, "Every time the insurer receives premium, there is a banking cost and processing cost attached to it.

Hence, as the periodicity of payment decreases, premium increases slightly. Sum of three monthly payments is more than the quarterly payment; sum of two quarterly payments is more than the half-yearly payment; so on and so forth."

Moreover, insurance companies claim that they too can reduce costs involved in following up on customers who forget to pay their premium on time. The frequency of calls would increase in case of quarterly and monthly premium.

Some of them also issue letter reminders on premium payment due dates, which can be reduced if the premium paying frequency is yearly, rather than semi-annually, quarterly or monthly.

It has also been found that those who opt for the quarterly mode of premium are more prone to policy lapses than those who have a yearly mode of payment, according to a spokesperson of a private insurance company.

Chances of non-payment are less likely in the monthly mode as companies insist on electronic clearing service (ECS). Some companies even penalise policyholders who choose monthly mode of payment and do not opt for ECS, by levying extra charges.


It also saves you the pain of asking your agent to come home and collect the cheques each month or quarter and keeping track of the various due dates in the entire year and whether the cheques have actually been debited toward premium payment.