Should you pay for your insurance premium annually, half-yearly, quarterly or monthly?

First and 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’re required to submit payment for two to three months first, often before underwriting even begins.

If you choose to make annual payments, you must of course have sufficient funds available to do it. You may opt to change the payment mode later if you wish.

In some cases, insurance companies have tie-ins with certain credit cards. For example, with Great Eastern, the OCBC-GE co-brand credit card allows your annual payment to be automatically split into 12 months, interest-free (IPP).

Depending on the type of insurance policy you are buying, it may make sense to make annual payments as the premium payable is lower. In other words, it is more expensive if you pay half-annually, quarterly or monthly.

Two instances when annual payments are preferred:

• If you have endowment or savings related plans, the longer your money is with the company, the earlier they can use it. Thus, they would prefer you make the payments annually.
• When the premium payment years are long, it can make quite a significant difference to the amount you have to pay.

Always check your quotation with your agent to see the difference between making payments annually versus monthly.

When the payment mode doesn’t matter

If your insurance policy is relatively new, chances are it’s an Investment Linked Plan (ILP).

• For ILPs, your premium payments are allocated to purchase unit trusts.
• Your insurance and 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 your ILP policy is buying as not all funds are equal.
• You can view the ratings for the funds in rating agency sites like Lipper.

When annual payments are better

When you pay for your insurance policy annually, you will enjoy higher returns if the market is performing well overall.

This is because your premiums (funds) are invested into the insurance company’s designated unit trust which earns returns.

With compounding interest, investing earlier brings higher returns.

When annual payments are not recommended

If the market is not performing well, it may be prudent to have your funds placed monthly as you will benefit from dollar cost averaging.

‘Dollar-Cost Averaging or DCA is 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)

Other thoughts

• You can also opt to put in your future premiums earlier. This amount would go into an Advance Premium Account or fund (APA) which gives you returns around FD rates.
• By making payments annually (or in advance), you have peace of mind in knowing that your future payments are already made and you will have less hassle tracking and arranging for payments.
• However, it is still down to your cashflow and convenience unless you are really into min-maxing your investment returns in your insurance policies.

Bear in mind however, than in most cases, you are buying insurance for protection purposes and not for investing.

Why your insurance agent prefers annual payments

Insurance agents are paid on a commission 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 may also 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 qualify for bonuses or incentives. A good agent however would put your needs first, not theirs.

This article first appeared in MyPF Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.