Life insurance is a crucial investment that lasts for many years. As a result, many things make up life insurance and one of them that is very crucial is the mode of premium. You cannot have life insurance without paying premiums.
Premiums in life insurance are the determinant of many things. One of them is whether your policy will remain active or not.
Premiums also form the basis for the agreement between you and the insurer on before and after death benefits. As a result, it is important to understand as much as you can about premiums.
Mode of Premium – What is It?
Whenever you buy a life insurance policy, you come to an agreement with your insurer on how to pay your premiums. You will have to settle to a certain method that will allow you to pay the premiums at specific intervals. The frequency that you choose becomes the mode of premium.
Many insurance providers have a variety of modes of premium for their clients to choose from. This is done to make sure that the clients have an easy time paying for their policies.
Since insurance providers have several types of modes let us look at them.
Types of Modes of Premium
#1. Annual Mode of Premium
This is also referred to as an annual premium payment. For this type of mode of premium, you are required to pay your premiums once every year.
For this option, you will find out that the premium amount is higher than other options that have more frequencies in a year.
Although the premiums are high since you will stay for a long before paying, some people prefer it since they have enough time to source for the money and they do not have to keep on worrying about paying premiums.
It gives you peace of mind as the only time you have to worry about premiums is once a year.
#2. Semi-Annual Premiums
It is another mode of premium where you are supposed to pay for your insurance cover twice a year. That means that you have to make a payment every 6 months.
If you are looking for a mode where you have to pay less amount at each interval as compared to the annual one then this is what you should go for.
The premium amount for each interval will be lower.
#3. Quarterly Premiums
For this mode of premiums, you are required to pay the premiums 4 times in a year. That means that you have to pay every 3 months.
The amount required for this option becomes lower when compared to the options discusses above. However, you will have to do the payments more times.
#4. Monthly Premiums
This is a mode or premium that offers you the highest number of intervals. For this one, you will have to make payments every month. In return, the amount you have to pay per month will reduce.
There is no other mode of premium that offers shorter intervals than this one. If you can know you can manage to pay monthly then you can take it.
#5. Modified Premiums
Modified premiums are available in whole life insurance. When you take a modified whole life policy then the premiums are also modified. This means that you will start by paying low amounts. You will pay low amounts for a specific period.
Once the time is over then your premium payments will start increasing gradually with time. The premium will increase up to an amount that is higher than other premiums but the one you have agreed on with your insurer.
One of the advantages of modified premiums is that it gives you time to plan your life as you pay very low premiums during the early stages. For people who have investments, it can also give you time for your investment to start returning then you can pay higher premiums in the future.
How Does the Mode of Premium Affect You?
The mode of premium you are using for your life insurance can affect you in two ways. One of them is the total amount of money that you pay at the end and another one is how much burden you have on you when paying.
If you are using a mode with a high frequency of payment, then know that you will pay less for each case, hence lowering your burden for each interval. However, in the end, you will have paid more in total. This is because many insurers are after collecting more and offsetting uncertainty.
However, if you are using a mode with a low frequency, then you will be paying higher per interval, which is a big burden. On the flip side, you will pay a lower amount in total when compared to other modes with a high frequency.
Who Selects a Mode of Premium?
The majority of insurance companies will give you a chance to select the most appropriate mode of premium for yourself. It is upon the insured to look at the various modes of premiums and decide which one to pick.
If you are going for modified whole life insurance, the company will tell you the lowest premiums you can pay for the early period of the policy.
You will also discuss with your insurer on how the premiums will increase at the later period of your policy. It is also crucial to discuss what is the highest amount you will pay.
When you are buying a life insurance policy you have to be careful about the mode of premium that you take. This will determine how easy is it for you to take care of your contract. If you take a mode that will be too heavy for you, it will be difficult to continue paying.
The best mode to pay is one that has few frequencies of payment since the total amount paid is low. However, make sure that you consider other factors such as liquidity. Consider how much money you have at the time to help you pay.