How do you calculate the cost of monthly life insurance premiums instead of paying annually? The answer isn’t quite as simple as dividing by 12, because as you know, paying a premium at an annual rate actually saves you some costs. That’s why, to be more precise, we use a Rate Calculator to find the “hidden” costs” of monthly debit charges.
Using the Rate Calculator to Find the Costs
Once you have your Rate Calculator, put the annual premium in the Present Value as a negative number (which changes it to Loan Balance) since the money is flowing away from you and to the insurance company.
Then change the mode to “M” for monthly and “Beg” for the beginning of the year, since premiums are due at the beginning of the period. Put the monthly premium payment in the Monthly Payment box and the Months as 12.
Once you have all these variables, the Rate Calculator will spit out an interest rate. This rate represents the “markup” on the monthly premium.
In the following example, the interest charge the company assesses you for paying monthly is 6.5%.
Your Clients’ Personal Economy
While 6.5% is not an insignificant interest rate, it doesn’t mean that paying monthly is a bad thing. The course you and your client choose should have more to do with their personal economy. For example, they may not be a particularly diligent saver, so they only have the monthly cash flow to contribute to a premium. They’re doing this purposely, to create savings with whole life insurance that shows up like a bill.
Maybe, in the future, they get to a point where paying premiums annually makes more sense. So they make the switch and save a bit of interest cost this way. In the meantime, they’ve still been doing something meaningful with their money, and are better off than if they’d done nothing at all.
Interest is something to be aware of, as in the above example. However, it should not be something that scares you or your client away from making a beneficial decision. We need to move toward financial literacy that helps us stay informed without acting out of fear (like avoiding insurance because you’re scared of the 6.5% on the monthly premium).