Should you pay life insurance premiums annually or monthly?
Life insurance is an affordable way to secure major financial protection for your family. After you buy a policy, you make regular payments, called premiums, to maintain your coverage. In return, your insurer pays your beneficiary thousands or even millions of dollars if you die while your life insurance policy is still active.
So how regular are those life insurance payments? That’s one of the things you will need to decide when you buy your policy, along with decisions like choosing a beneficiary and the type and amount of coverage to buy.
Depending on the life insurance policy, you might have options for different payment schedules, including monthly or annual payments. There are a few factors to consider when deciding how frequently to make payments, including cost and convenience. Here’s a closer look at how each method works, so you can choose what’s best for you and your family.
What is a life insurance premium?
A life insurance premium is a payment you make regularly to keep your coverage active. These are typically monthly payments, but some insurance companies offer different payment schedules, like annual or even semi-annual.
In exchange for your premiums, your life insurance provider will provide a guaranteed payout to your beneficiary if you pass away while you’re covered. With permanent policies, like whole life or final expense coverage, your life insurance plan will also have a cash value component that builds over time. You can borrow against this cash value, use it as collateral for a loan, or just let it grow during the life of the policy.
When choosing your premium payment schedule, keep in mind that you need to continue to pay your premiums to keep your life insurance policy active. Failing to make payments promptly can cause your life insurance policy to lapse. Most life insurance premiums stay level throughout the life of the policy, which can make it simpler to plan and budget for the payments.
How do life insurance companies calculate premiums?
Your life insurance premium depends on a few different factors. Some of these factors are based on your demographics, health, and lifestyle, and some are related to the life insurance policy itself.
When you first apply for life insurance, you’ll get a quote based on your personal situation. Once you’re approved, the life insurance company provides your final rate for your insurance coverage. This can be different from the original rate, depending on the information you shared in the full application and the results of your medical exam.
Personal Factors That Impact Your Premium
- Your age. The cost of life insurance goes up each year as you get older, typically anywhere between 8% and 10%. To get the best premiums, it’s better to buy a life insurance policy earlier in life. The good news? Once you buy, your rate is locked in for the life of the policy.
- Your health. Your health impacts the average cost of life insurance as well. This includes factors like whether you have a chronic illness, any history of major illnesses or surgeries, and whether you smoke. Your insurance provider will also look at your family’s medical history for any clues that might indicate an elevated risk of early death.
- Your lifestyle. Your driving record and hobbies can all affect life insurance costs. Risky activities, like skydiving or piloting a plane, can mean higher rates or make you ineligible for certain types of coverage.
Policy-Related Factors That Impact Your Premium
- The amount of coverage. Insurance companies offer a range of coverage amounts for life insurance, from a few thousand dollars for a final expense policy to $1 million or more for term life insurance. In general, the more life insurance you buy, the higher the rate will be.
- The type of policy. Deciding between term vs. permanent life insurance? The type of life insurance you buy also affects your premium. Term life insurance is significantly less expensive than permanent life insurance, which makes it a better fit for most family budgets.
- The policy length. If you opt for term life insurance, you’ll need to choose a term length. This is how long the policy is active from the date you buy it, and typically ranges between 10 and 30 years. A shorter term will cost you less than a longer term.
- The insurance company. Wondering why two companies quoted you different prices for the same amount of coverage? Every life insurance company has its own underwriting guidelines, which determine your eligibility and the price you pay for life insurance. If you’re cost-conscious, it can be helpful to work with an agent like eFinancial that can help you shop and compare quotes for multiple companies.
Interested in seeing how much you might pay for life insurance? eFinancial offers personalized online quotes with your estimated payment for a range of life insurance policies.
What is a mode of premium?
When you buy your life insurance policy, you will select a life insurance mode of premium payment. This refers to how frequently you make your payments, as well as how you make payments. Depending on the insurance company and the payment schedule you select, you can typically make payments via electronic fund transfer (EFT) from your bank, credit card, or check.
Your life insurance provider should let you know how frequently you will make your life insurance payments when you purchase your policy. In most cases, you’ll make your first payment right away to activate the policy.
Options for making premium payments
There may be a few different options available for making payments:
- Monthly payments. This is by far the most common option for paying your premiums. You make a payment each month to keep your life insurance policy active, based on the date you purchased the life insurance policy.
- Annual payments. When you buy life insurance with annual premiums, you pay one lump sum every year to keep your life insurance policy active. Your life insurance company may offer a discount when you make annual payments. The reduction can range up to 5% of your total premium, since there’s usually less processing and administration required on their end.
- Semi-annual or quarterly payments. The semi-annual or quarterly payment option is less common and not ideal for most people, since you still need to make large lump sum payments but don’t usually get the benefit of a discount on the payment.
How to decide whether to pay premiums annually or monthly
Wondering which mode of premium payment will work best for you? The right answer depends on your income, your monthly budget, and your personal situation.
In general, annual payments tend to be cheaper overall. That said, monthly payments can be easier to fit into your family’s ongoing budget, since you don’t have to make large payments all at once. Here are a few factors to consider before you decide:
- Cost savings. The discount on annual premium life insurance can add up, especially if you plan to have your life insurance policy for decades. Depending on the type of life insurance you choose and the length of coverage, you could end up saving hundreds of dollars or more in payments over the life of your policy.
- Budgeting. Depending on your income, it might be easier to fit smaller life insurance monthly premiums into your budget. Especially for young families, the daily expenses of life can make it difficult to plan for and pay a large lump sum for coverage. The median checking account balance is around $2,000, and an annual life insurance payment can take a huge bite out of that balance.
- Convenience. An annual premium means fewer payments to track throughout the year, resulting in fewer chances to miss a payment and risk a life insurance policy lapse. If annual payments are not right for you, though, you can always set up autopay so that you don’t have to worry about keeping up with a premium payment each month.
To see how the two payment methods stack up cost-wise, let’s look at a $500,000, 30-year term life insurance policy for a 30-year-old woman, which costs about $42 per month.
With a 5% discount on the policy for an annual premium payment, she would pay about $478 rather than $504 total per year for monthly premium life insurance. Over the lifetime of the life insurance policy, she can save $780 in payments. The takeaway: An annual discount might seem small, but it can definitely add up over time.
What happens if I miss my payment?
If you stop making your life insurance payments for any reason, your policy will lapse, meaning that you are no longer covered by the policy and that the life insurance company won’t pay out your death benefit to your beneficiaries if you die. Lapses can happen for several reasons, including:
- You update your banking or other personal info and forget to update it with your life insurance carrier.
- Your budget gets tight and you simply can’t afford payments anymore. This is one major reason to consider term life insurance instead of permanent life insurance, since premiums are more affordable.
- You decide that you don’t want the policy anymore and discontinue the premium payments.
If you did miss a payment by mistake, don’t panic. The life insurance company won’t cancel your policy immediately. Life insurance companies usually have a grace period of roughly 30 days for you to make up the premium payment. During that time, you’re still covered by your policy if something happens. When you make up the payment during the grace period, you might also need to pay a late fee.
If your life insurance policy lapses and you still want coverage, you may have the option to reinstate your policy. Each life insurance company has its own method of reinstatement. Many life insurance companies will enable you to reinstate your life insurance policy within two years, but you might need to sign a document saying that your health has not changed, pay back your premiums with interest, and go through a new contestability period. Depending on how long it’s been since the policy lapsed, you might also need to go through a life insurance underwriting process, which often includes a medical exam.
If you do reinstate your policy, you’ll typically need to make up the fees and back payments since the policy became inactive. In some cases, it may be more affordable to just buy a new policy. An agent can help you weigh your options and choose the best route.
What happens if I make annual payments and die at the beginning of the term year?
You might be wondering what would happen if you choose to pay your term life insurance policy’s premiums on an annual basis but die at the beginning of your term year. For example, what happens if you pay your annual premium of $450 in August and die in September?
Most states require that life insurance carriers return these unearned life insurance premiums, but even if your state does not require this, many life insurance carriers still return the premium payments as a courtesy. The life insurance company would write a check for the death benefit total and include a separate check refunding the premiums that would have covered October through the following July. This is the case for term life insurance policies, but some permanent life insurance policies have their own rules.
What if I need to change my payment schedule?
It’s not a problem to change your life insurance payment schedule. In most cases, this is as easy as contacting your insurance company and requesting a change to the payment schedule.
When you set up your policy payments, you’ll also need to select a form of payment, like credit card, electronic fund transfer (EFT), or check. Many insurance companies require an EFT if you choose to make monthly payments. Setting up autopay can help you make sure that you don’t miss a payment and put your life insurance coverage at risk. If you prefer to pay by check, then you might need to make your payments annually.
Still have questions or want more information about life insurance premium options?
We’re here to help. eFinancial works with top-rated life insurance companies to help you find the right coverage for you and your family. Call us or start your quote online today.
At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.