What are the standard payment options for a life insurance policy?
UPDATED: Mar 19, 2012
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Asked March 19, 2012
Purchasing life insurance gives you a number of payment options. Instead of being locked into monthly payments, you can also choose to pay quarterly, annually, or even pay the full cost of the policy in one or more lump sum payments. Each payment option has its own advantages, so consider them before you buy the policy, to help you get the most out of your life insurance.
Of the payment options available, making monthly premium payments will generally be the most expensive way to go, even though monthly payments is the most common form of payment used. With monthly premium payments, it take a lot longer for the insurance company to reach a point of balanced risk, and that means your premiums have to be higher to pay in the risk-balancing portion of the loan as quickly as possible.
Quarterly payments must be made every 3 months, and generally save you a small amount over the cost of making monthly payments. By paying quarterly, the insurance company receives their risk-balancing portion of the policy faster, which translates into a lower risk to insure you and lower payments that must be paid.
Annual payments to a life insurance policy require large premiums to be paid once a year. Since you are paying for a larger slice of the premiums up front, your risk level is lower and the premiums you pay will reflect it. The major obstacle with annual payments is that you have to provide the entire year's premiums all at once, and that introduces a financial burden for many people.
Finally, you have the option of paying the entire cost of your premiums in one payment. This method provides for the lowest possible premium payments, because a calculated lump sum is initially deposited into the policy account. Using this method, the premiums are low and the value paid into the account will earn interest to pay for the future costs of the policy. To save the most money using this method, it is best when the purchase is made early in life, such as in your early to mid-twenties. Even better, purchase a policy outright for a small child and not only will the policy pay for its own maintenance, the child will have a substantial amount of accessible money available in the policy by the time she is ready to settle down.
Answered March 19, 2012 by Anonymous