Should I pay my life insurance premiums annually or monthly?

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Should I pay my life insurance premiums annually or monthly?

One of the decisions you’ll have to make when it comes to life insurance – after those pesky details like how much coverage you need and what provider to go with, of course – is when you’re going to pay your life insurance premiums.

Annual and monthly payments are the most common options that life insurance policyholders choose. But which one is right for you?

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Choosing your payment schedule

The premium of an insurance policy is the cost of purchasing the policy. It’s what keeps your insurance policy active (or "in force") so the insurer will pay out if, in the case of life insurance, you die.

As mentioned, annual and monthly premiums are what most people will decide between, but you can usually choose to pay premiums on a few different schedules:

  • Annually – once a year

  • Semi-annually – twice a year

  • Quarterly – four times a year

  • Monthly – twelve times a year

The amount you pay depends on how often you pay; you’ll pay the full premium at once if you’re paying annually, or you’ll have the premium cost divided by twelve if you pay monthly.

Simple enough, right?

But these choices aren’t there just for the heck of it. They can have a big impact on exactly how much you’re spending on your life insurance, and making the wrong choice for your situation could end up costing you big.

Paying premiums annually

Paying your life insurance premiums annually is almost always the cheapest option.

It costs more for the insurance company if a policyholder pays premiums monthly. First, they have to keep track of more premium payments to make sure a policy stays in force. This adds to administrative costs.

As with most companies, insurers aren’t just going to eat these costs. They pass them on to the policyholders. Paying an annual premium is a great way to cut down on policy costs, because insurers will almost always give a better rate for annual payments than monthly.

It also means the insurer have less money to deal with because they aren’t working with the entire premium amount. They would rather have $160 to work with right away than getting $15 every month, for example. Making it more enticing for people to pay more quickly benefits the insurer.

So how much can you save? That depends on the insurer. But if you look at our life insurer reviews, you can see the annual vs monthly discount under the plan details. Some discounts are as high as 8%, which can add up to huge savings.

It’s also less of a hassle on your end to pay annually. You don’t have to worry about having the money throughout the year, making sure you pay your premiums (or taking the time to set up automatic payments). You pay once and it’s out of sight, out of mind for the entire year.

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Paying premiums monthly

The argument for paying annually is appealing, right? But paying premiums on a monthly basis has its benefits, too.

  1. You can spread the cost of the premium out over time. Sure, it’s nice to save 5%, but not everyone has the cash on hand to drop $150+ on a premium at one time. You might need to budget the cost out across every month (or quarter, or however often you can afford to pay). Having life insurance doesn’t matter if you can’t afford the premiums, so if spreading the cost out is what allows you to make the payments, consider a monthly plan.

  2. You can do other stuff with that money. Maybe you can afford an annual payment...but you just don’t want to. You don’t like the idea with parting with so much money at once and you can invest the extra money, for instance. Pay your monthly premium and stick the rest of your would-be annual premium payment in a mutual fund. After all, if the cost difference is small, maybe you can beat it with interest, right? That, or you can go on a shopping spree with it! (Note: don’t go on a shopping spree with it.)

Should I pay annually or monthly?

As with most financial situations, the answer to this question depends on your individual circumstances. But all budgetary things being equal – your finances are in decent shape, you can spare the money, and so on – you should pay annually, because that will almost always be the most efficient way to spend your money.

One of the most important aspects of being fiscally responsible is to make sure your money isn’t working against you. That means avoiding things like unnecessary fees and cost increases. If there isn’t a penalty for paying monthly, then you can make your decision based on your available funds and what will make a bigger headache for you: paying a lot at once, or losing a bit throughout an entire year.

But if, as with most insurers, you’ll get a discount for paying annually, you should make that a priority. After all, you’re getting the same coverage. Why should you pay more for it?

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