Premium Payments: Modes, Types & Provisions

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology and is holds certifications as a CIA, CISA, CFSA, and CPA, CA.

Policyowners have the flexibility to choose the type of life insurance policy that suits their needs, as well as select the frequency of premium payments. In this lesson, you will learn about premium payment modes, types of insurance, and policy provisions.

What Are Premium Payments?

Let's meet Sally, who plans to purchase life insurance. Sally's agent indicated that she has flexibility when it comes to how often she pays her policy premium. Premium payment represents the cost of the insurance policy and Sally wants some advice on which policy to select, how often to pay her premium, and policy provisions. Let's see if we can help her.

Modes of Premium Payment

Mode refers to the frequency with which a policyowner makes premium payments. If Sally decides to purchase insurance, she could pay her premiums:

  • Annually
  • Semi-annually
  • Quarterly
  • Monthly

An annual payment would require Sally to pay her premium once a year. This would be the most affordable option for her, since the insurance company wouldn't spend as much time and money processing payments. While this option would be best from a cost perspective, Sally would have to determine if she can afford to pay this premium all at once.

If Sally chose a semi-annual payment, then she would pay her premium every six months (twice a year). Her premium payments would be a bit higher than if she chose an annual payment frequency, but it might be easier for her to budget for two smaller payments instead of one larger one.

A quarterly payment would require Sally to make a payment every three months (four payments a year). Sally would find it easier to budget for four smaller payments, but her policy premium would be higher.

A monthly payment would require Sally to pay a premium every month (twelve times a year). This option would be the best for Sally's budget as she would pay a smaller amount every month. However, it would likely have the highest policy premium, since the insurance company would need to process these twelve payments per year.

Types of Insurance

Sally also has to decide whether she wants flexibility over the premium amount she pays. For example, she could select a level-premium policy or a flexible premium policy. Let's take a look at each of these policy types.

Level-Premium Insurance

If Sally wants to keep her premium the same throughout the life of the contract, she would select a level-premium insurance policy. For example, if Sally purchased a 10-year level-premium policy, she would pay the same premium amount for all ten years. At the end of the term, she would have to decide whether she wants to renew her coverage. Her premium would likely rise at the time of renewal, as she would be older.

Since it is a type of term insurance, a level-premium insurance policy would only pay a death benefit when Sally dies and would not give her any opportunities to save money within the policy.

Flexible Premium Insurance

If Sally wants flexibility over her premium amount and frequency of payments, she could select a flexible premium policy. This type of policy provides a death benefit, but it would also allow Sally to save money within the policy. In addition, Sally would have an opportunity to change the face amount of the policy or the amount of death benefit the insurance company would pay, as well as the amount of her premium and the payment period.

One advantage of this type of policy is that it would allow Sally to alter the policy as her life circumstances change. For example, if Sally were to have children, she could increase the face amount of the policy without having to apply for and be approved for an additional insurance policy.

Policy Provisions

Some policy provisions are mandatory and others are not. Let's examine two common policy provisions.

Grace Period Provision

A grace period provision is mandatory and gives a policyowner some leeway in case he/she pays the premium after the due date. If a payment is made after the due date but during the grace period, the insurance company cannot cancel the policy. Grace periods usually range from one to 30 days and an insurance company would include the number of days in the policy contract.

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