Understanding Option Chain

Premium Payment Frequency – Are You Paying Higher Insurance Premium

The insurance premium is one of the key considerations while buying an insurance policy. At first, to buy insurance or not is a big dilemma, i answered this question in my post to buy insurance or not. Please note that insurance premium is dynamic and variable from case to case basis. Considering everything being equal we prefer a policy with lowest insurance premium. There are multiple factors that impact your insurance premium. For example, Monthly income benefit in term insurance plan can increase your premium. One way to save insurance premium is to buy an online policy. It is a known fact that you will be paying high insurance premium if you buy the policy through an agent/offline channel.

Besides online mode, there are certain tips for each type of cover to reduce insurance premium. For example, i shared for health insurance in my post, Health Insurance Premium – 11 Tips to Save. There are large no of websites that can help you in comparison of insurance premium offered by various insurance providers along with their features & benefits. Just to add that insurance premium is paid in advance. Secondly, the premium shown by comparison websites is annual premium and it may vary based on the frequency of payment.

Premium Payment Frequency – Are You Paying Higher Insurance Premium

The insurance providers offer multiple choices to customers to select the frequency of insurance premium. The biggest mistake by the customer is that though they compare premium offered by various insurance providers but they don’t compare premium offered under various payment frequency options.

Normally the options are annual, half-yearly, quarterly or monthly. To avoid too many administrative hassles and desist customer with a low premium policy to opt for a granular option like monthly or quarterly the min premium is fixed. Say, for example, min premium for various options is as follows

Monthly: Rs 300

Quarterly: Rs 600

Half Yearly: Rs 1100

Yearly: Rs 2000

Though it will be too harsh to say but in my opinion, granularity is a marketing gimmick to make more customers buy an insurance policy. It is similar to sachet concept of FMCG. It may or may not be financially beneficial for the customers. For any FMCG purchase, i always compare the total cost of sachet packs with standard 1 Kg cost. Similarly, the annual premium paid under monthly, quarterly or half-yearly option during the year may or not be equal to the total premium paid under annual option.

Let’s take the example of a policy A i.e. money back policy of approx 2 Lac coverage. The premium options are as follows

Yearly: Rs 20,000

Half-Yearly: Rs 10,250

Quarterly: Rs 5,250

Monthly: Rs 1,733

The right way to compare is to check the annual premium paid under each option. Therefore, total annual premium under each option will be

Yearly: Rs 20,000

Half-Yearly: Rs 20,500 (2.5% premium over yearly option)

Quarterly: Rs 21,000 (5% premium over yearly option)

Monthly: Rs 22,000 (10% premium over yearly option)

This is just a hypothetical example and figs may vary from case to case basis. These calculations are irrelevant in case i cannot pay a premium on a yearly basis. Therefore, option for granular payment frequency can increase your insurance premium outflow. Moreover, as i keep highlighting that you should not buy a policy just because it is cheap. In certain cases, you don’t need it also as i shared in my post, Life Insurance Plan – 5 Possible reasons why you should not buy.

Defer the Insurance Premium Payment

There is another angel to all the calculations shared in my previous section. Assuming i can pay a yearly premium but still opt for the quarterly option with a reason. I deposit the premium in Investment option A wherein i can generate 8% annual return. Therefore in layman terms, i paid 5% additional premium but generated 8% return. Thus i saved 3% premium amount. These calculations are subjective and may vary from case to case basis. In absolute terms, the savings are high in case of high premium policies.

In low premium policies, the effort is not worth. The reason being, granular payment frequency is an operational nightmare for the insured. You need to keep track of payment dates, payment receipts, fund availability, tax deduction etc. Even if you opt for ECS, you cannot rely 100% on the same. As i keep getting cases wherein there was an issue in the execution of ECS and the customer suffered because of that. In case ECS or payment is missed by the insured, an insurance policy may lapse in such cases.

Also Read: 7 Free or Cheapest inbuilt Insurance Covers

The Best Premium Payment Frequency

In my opinion, the yearly option is the best considering the operational hassles involved for the insured. Secondly, for low premium policies without second though you should opt for yearly premium payment. Imagine you need to keep a record of 12 payment receipts of Rs 500 each to claim income tax deduction.

In the case of high premium policy, it might be beneficial to opt for monthly, quarterly, half-yearly etc. Assuming the annual premium under yearly option and the quarterly option is same then you may opt for the quarterly option. The reason being, why to pay in advance. For example, if my annual premium under yearly option is Rs 60,000. Whereas under quarterly option it is Rs 15,000. In this case, it makes sense to opt for quarterly option even if you can pay annual premium in a single shot. The deferment is good from a personal finance perspective.

Lastly, you should always keep in mind that this option to select premium payment frequency is available only at the time of availing insurance policy. You cannot change it once the policy is issued/commence. Therefore, you should check all the permutation and combination at the time of availing policy to avoid any regret in future.

Words of Wisdom:

The return of insurance policy bought for investment like money back plan, endowment plan etc is just 4% to 5%. In case you are paying a 4% extra premium then indirectly you are neutralizing your returns. The best part is after availing policy you will never come to know about this :). You will calculate returns on premium paid under monthly option but what about savings of 4% to 5% if you would have opted for the yearly option.

As i mentioned that each insurance policy has its own set of rules and methodology to calculate insurance premium. If you are planning to opt for the monthly, quarterly or half-yearly option then it is imp to include insurance premium payment frequency as one of the criteria to select a particular insurance cover.

Personally, i will not mind paying a slightly higher premium to manage my personal finances i.e. defer premium payment for a policy like Term Insurance etc. At the same time if i bought an insurance policy purely for investment purpose then you may opt for granular option i.e. monthly, quarterly or half-yearly only if the difference in premium is NIL between various options.

Copyright © Nitin Bhatia. All Rights Reserved.

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