Should I pay for my insurance premium annually, half-yearly, quarterly or monthly? Does it make a difference? (Note: My apologies in advance if this ruffles the feathers of any insurance agents)
Should I pay for my insurance premium annually, half-yearly, quarterly or monthly?
First & foremost it would depend on your personal cash flow. Let’s look at what happens when you sign up for a new policy:
– When you make your first initial payment, you would need to submit 2-3 months premium first, often before underwriting even begins.
– If you make payment on an annual basis, you would of course need to have sufficient funds available. You may opt to change the payment mode after that as you wish.
– Another alternative is insurance companies have tie-ins with certain credit cards. For example with Great Eastern, the OCBC-GE co-brand credit card would allow you to have your annual payment automatically split into 12 months of 0% interest free (IPP).
Yes (in some cases)
Depending on the type of insurance policy you are getting, it may make sense to make payment on an annual basis as the premium payable is lower for annual payment (or in reverse more expensive if you pay half-annually > quarterly > monthly).
– These type of plans are usually endowment or savings related plans. The longer your money is with the company, the earlier they can use your money thus they would prefer you to make the payment annually.
– Especially if the premium payment years is long, it can make quite a significant difference to the amount that you have to pay.
– Thus always check out your quotation (and/or ask your agent) to see the difference between making payment annually versus monthly.
Yes & No (Depending on market)
If your insurance policy is relatively new, chances are it is an Investment Linked Plan (ILP).
– For an ILP, what happens is that your premium payments are allocated to purchase unit trusts.
– Your insurance & other charges are then deducted from the unit trusts value.
– While relatively less volatile than Malaysian unit trusts/mutual funds, it is still important to know which fund that your ILP policy is buying as not all funds are equal.
– You can view the ratings for the funds in rating agency sites (I recommend Lipper)
When you pay for your insurance policy on an annual basis, your returns would be better when the market is overall performing well. This is as your premiums (funds) are invested into the insurance company’s designated unit trust which earns returns. With compounding interest, investing earlier would bring higher returns.
When the market is not performing well. In these sort of scenarios, it may be prudent to have your funds placed in monthly as you would benefit from dollar cost averaging.
Definition of ‘Dollar-Cost Averaging – DCA’
The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high (Source: Investopedia)
– You can also opt to put in your future premiums earlier. This amount would go into a APA (Advance Premium Account or fund) which gives you returns around FD rates.
– By making payments annually (or in advance), you have the peace of mind in knowing that your future payments are already made & have less hassle of tracking & arranging for payments.
– However, more importantly is still down to your cashflow & convenience unless you are really into min-maxing your investment returns in your insurance policies.
(But then in most cases, you should be buying insurance for protection purposes & not for investing – which brings us to a whole new discussion which we will leave for another day 😉 )
Oh. And why would your insurance agent prefer that you pay annually then?
Insurance agents are paid on a commissions basis. If you make an annual payment, they would thus receive the commission for the entire sum paid in one lump sum. Another factor is that insurance agents also may receive bonuses or incentives based on the amount paid or collected in the calendar year. Receiving payment on an annual basis would help the agent to qualify for bonuses or incentives. A good agent however would put your needs first, always.
Questions on Payment? Let us know!