Should you pay life insurance premiums monthly or annually?
Quick Facts
Life insurance premiums can be paid monthly, semi-annually, quarterly, or annually depending on the life insurance company and policy
Paying your life insurance premium monthly allows the cost to be equally spread out over 12 payments
Paying your life insurance annually requires payment in one lump sum
Policyholders have their choice between different payment plans when paying their life insurance premiums. Depending on the life insurance company and policy, payments can be made monthly, semi-annually, quarterly, or annually.
Paying semi-annually, quarterly, or monthly allows the cost to be equally spread out over two, three, or 12 payments, while paying annually requires payment in one lump sum. Each option has its benefits, but since every policyholder’s circumstances differ, not everyone chooses the same payment plan.
We’ll review the different modes of premium to help you answer the question should you pay life insurance premiums monthly or annually.
Monthly vs. Annual Life Insurance Premiums
Since monthly life insurance premiums are paid over 12 months, a payment is made every month on a specific date. Payments are fixed, so this helps with budgeting because policyholders can anticipate the payment amount. If you want to keep up with the monthly payments, consider automatic payments, which can ensure you avoid policy lapse or cancellation.
Annual premiums are paid in one lump sum every year. With one payment, there is little risk of policy lapse, and you may receive a discount.
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Understanding the Mode of Premium Payment
Your life insurance policy goes into effect after the first payment is made. Before the purchase is made, you should be able to choose and confirm the mode of premium. Depending on the life insurance company, you may be able to change the mode of the premium during the policy term, and the new payment date will be due on the pre-existing billing date.
For example, if you change from annual to monthly payments, your first monthly payment will be on the same date as your next annual payment for the amount of the monthly premium. And monthly payments would continue for the rest of the year on the same billing date.
Impacts of Mode of Premium
Is it cheaper to pay insurance annually? Overall, the cheapest option would be paying annually because of the potential discount life insurance companies offer policyholders.
You can look at monthly payments as a loan. If you don’t repay the loan in one lump sum, you’ll make monthly payments over time, which is more expensive because interest is paid. While a life insurance policy is not a loan and policyholders don’t pay interest, monthly payments ultimately make the policy more expensive. Let’s say your total premium is $2,000, with monthly payments, you’d spread the cost over 12 payments, which equals $166.66 per month.
If you pay the premium in one lump sum, there is less of a risk of late or missed payments by the policyholder when the premium is paid annually, which insurance companies often find value in. In fact, many insurance companies award a discount of three to five percent to policyholders who pay annually, so that could bring the $2,000 premium down to $1,900, saving you $100. Paying annually also increases the policyholder’s cash flow since they don’t have to factor life insurance into their monthly expenses.
How to Decide Which Mode of Premium is Right for You
When deciding which mode of premium is best for you, consider your income and budget. Paying annually requires one payment, but if you can’t afford to pay $2,000 upfront every year, paying monthly might be the better option.
For example, the average monthly premium for a 20-year, $100,000 term life insurance policy for a healthy 25-year-old male is $14. If paying annually, the premium, with a 3% discount, is about $3,260. Taking this average, think about how much you can afford and which mode of premium may be best for your budget. Of course, your premium could be higher or lower, but this can give you a good idea of how much a policy can cost. Find out how to get term life insurance quotes.
Even though you won’t get a discount for paying in one lump sum, you’ll have a more manageable monthly payment that fits into your budget. You can always review your income and budget and switch to annual or monthly payments if you can afford them.
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How do life insurance companies calculate premiums?
The life insurance application process can be a lengthy one. You’ll first answer a few questions and receive a quote, but you’ll need to provide a detailed application and may also be required to complete a medical exam, depending on the life insurance company and policy. Your application and the results of the medical exam allow the life insurance company to calculate your rate, which may be different from the original quote.
Similar to car insurance companies, life insurance companies take several different factors into consideration when calculating life insurance premiums, including the following:
Age
Gender
Health
Lifestyle
Occupation
Life insurance company
Type of policy
Policy
Coverage amount
Life insurance riders
We’ll take a closer look at how these factors impact your premium.
Personal Factors That Impact Your Premium
Your age, health, and lifestyle are used to calculate your insurance premium.
Age: Life insurance rates start to increase around your late-20s and continue to increase as you age, so rates are cheaper the younger you are.
Health: Illness, surgeries, smoker status, and family medical history
Lifestyle: Driving record, recreational activities, and hobbies
When reviewing these three factors, insurance companies are considering your risk of death. So if you have a chronic illness or engage in risky activities, you may not be eligible for life insurance coverage, and if you are, it will likely be expensive.
Policy-Related Factors That Impact Your Premium
The cost of your premium is impacted by the life insurance company, type of policy, policy term, and coverage amount.
Life insurance company: Life insurance companies have different types of life insurance policies and life insurance underwriting guidelines, so how your age, health, lifestyle, and other factors impact rates vary.
Type of policy: Between the two main types of life insurance, term life, and permanent life insurance, term life insurance is less expensive.
Policy term: Term life policies typically have terms of one, five, 10, 15, 20, 25, or 30, and the longer the term, the more expensive the policy. Check out the different types of term life insurance.
Coverage amount: Coverage amount can range from a few thousand to millions of dollars. The higher the coverage amount, the more expensive the life insurance policy.
Although the actual cost of your life insurance policy may be different from your initial quote, it could be helpful to compare quotes from different life insurance companies.
Choosing Your Life Insurance Type and Coverage Amount
Term life and permanent life insurance both have their benefits, so considering the key differences will be a good start. For example, if you want low-cost coverage for a period of one to 30 years with the option to renew or convert to permanent, term life is a good fit. If you want lifelong coverage that is expensive but offers cash value and a fixed premium, whole life might be the best option for you.
Once you figure out what type of life insurance policy you want, you’ll want to choose a coverage amount.
To calculate your coverage needs, consider using one of the following methods.
Coverage will provide 10 years of income replacement. For example, if you make $70,000/year, you’ll multiply that by 10, which equals $700,000.
Annual income x 10 + $100,000 per child
Coverage will provide 10 years of income replacement as well as cover up to $100,000 for each of your children’s educational expenses. For example, if you make $70,000/year, you’ll multiply that by 10 and add $100,000/child, which equals $800,000 if you have one child.
Debt + income + mortgage + education
Known as the DIME formula, this method combines debt, income replacement amount, mortgage balance, and educational expenses for your children, which are the four common areas used to calculate an individual’s death benefit.
You can also use QuickQuote’s term life insurance calculator to help you figure out how much life insurance coverage you need. You can also find out how term life insurance rates are calculated.
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The Bottom Line on Life Insurance Premiums
While policyholders can choose between monthly, quarterly, semi-annual, or annual payments, many opt for annual or monthly payments. Ideally, you’ll choose the option that fits best with your income and budget. Life insurance can be expensive, so spreading the payment out over 12 payments can help you easily manage payments. However, you can potentially save money when buying a life insurance policy if you pay annually.
If you aren’t sure which option is best, you can always speak with a life insurance agent who can help you choose the mode of premium that is the better fit for your individual circumstances.
Frequently Asked Questions
What does life insurance cost on average?
The cost of life insurance is based on several factors, including gender, age, lifestyle, family medical history, and hobbies, so no two people pay the same amount.
For example, the average monthly premium for a 20-year, $100,000 term life insurance policy for a healthy 25-year-old male is $14, while the average monthly premium for a 20-year, $100,000 term life insurance policy for a healthy 25-year-old female is $13.
How do I pay my life insurance premiums?
Life insurance premiums can be paid monthly, quarterly, semi-annually, or annually. Depending on which options you choose, you make one, two, four, or twelve equal payments by check or electronic bank transfer.
Should I pay monthly or annually for life insurance?
When choosing between monthly and annual life insurance payments, consider your income and budget. For some, paying monthly works best because the premium is spread out over 12 payments, which may be easier to manage. However, for those who can afford to pay in one installment, paying annually allows them to pay less for the policy and avoid the hassle of remembering to make a payment every month.
What policy-related factors impact life insurance premiums?
The cost of your premium is impacted by the life insurance company, type of policy, policy term, and coverage amount.
Life insurance company: Life insurance companies have different underwriting guidelines, so how your age, health, lifestyle, and other factors impact rates vary.
Type of policy: Between the two main types of life insurance, term life and permanent life insurance, term life insurance is less expensive.
Policy term: Term life policies typically have terms of one, five, 10, 15, 20, 25, or 30, and the longer the term, the more expensive the policy.
Coverage amount: Coverage amount can range from a few thousand to millions of dollars. The higher the coverage amount, the more expensive the life insurance policy.
Your initial quote may differ from what the life insurance charges once the application and medical exam are complete, but it can still be helpful to shop around and compare rates.
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Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states.
After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in…
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Written by
Rachael Brennan
Licensed Insurance Agent
Benjamin Carr worked as a licensed insurance agent at State Farm and Tennant Special Risk. He sold various lines of coverage and informed his clients about their life, health, property/casualty insurance needs.
Assessing risks and helping people find the best coverage to suit their needs is a passion of his. He appreciates that insurance was designed to protect people, particularly during times…
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Reviewed by
Benjamin Carr
Former State Farm Insurance Agent
