Your life insurance premium is what you pay to the insurance company to keep your policy active. The mode of premium payment refers to how often you make payments: annually, semi-annually, quarterly, or monthly.
Annual and monthly payments are the most common payment frequencies. Annual payments save you some money and are a good option if you’re able to pay a larger sum upfront, but monthly payments can be more manageable for the average person.
Life insurance terms you should know
Beneficiaries: The people you name on your life insurance policy to receive the lump sum of money — also known as the death benefit — when you die.
Cash value: The portion of a permanent life insurance policy’s monetary value that grows tax-deferred over the life of the policy.
Death benefit: The amount of money the life insurance company will pay your beneficiaries when you die.
Face amount: The dollar amount, or death benefit, your beneficiaries receive if you die while your life insurance policy is active.
Insured: The person who is covered by the insurance policy.
Policy: The legal document that includes the terms and conditions of your life insurance contract.
Policyholder: The person who owns an insurance policy. Usually, this is the same person as the insured.
Permanent life insurance: A type of life insurance that lasts for the rest of your life and usually includes a cash value account.
Premium: The amount you pay your insurance company to keep your coverage active. Premiums are typically paid monthly or annually.
Riders: Add-ons to a life insurance policy that provide more robust coverage, sometimes for an extra cost.
Term life insurance: A life insurance policy that lasts for a set number of years before it expires. If you die before the term is up, your beneficiaries receive a death benefit.
Underwriting: The process where an insurance company evaluates the risk of insuring you and determines your final rate.
Monthly vs. annual premiums
You pay monthly premiums once a month, on the date of your billing cycle. While splitting up the premiums is better for some budgets, missing payments can risk a policy lapse. With annual premium payments, you only pay one lump sum to your insurer each year. Annual premiums mean fewer payments to track, as well as a bulk discount.
Monthly premium payments | Annual premium payments | |
|---|---|---|
Discount | No | Yes, 2% to 5% |
Payments per year | 12 | 1 |
Sample premium | $26 to $31 | $300 to $357 |
Best for | Someone who finds it easier to budget month-by-month | Someone who can afford to pay a large sum once per year |
How to decide which mode of premium is right for you
Paying life insurance premiums semi-annually or quarterly rarely makes sense because you won’t see a meaningful price discount for larger lump sum payments. So, should you pay policy premiums monthly or annually? That depends on your individual circumstances, including your income and budget.
For many, paying a large lump sum each year isn’t ideal. If it’s easier for you to track a monthly expense or you can’t afford to pay upfront, there’s no harm in paying for a term life insurance policy with monthly premiums.
But, if you’re equally comfortable paying annually or monthly, then it makes more sense to pay annually. Discounts mean you’ll almost always pay a lower premium, generally between 3% and 5% lower, and you’ll only need to worry about a single payment.
