Is annual premium payment mode in insurance schemes better than other modes?

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Is annual premium payment mode in insurance schemes better?
Traditional as well as ULIP plans of different insurance companies provide policyholders with the option to choose from either of the available premium payment modes at their discretion. But, choice of annual premium payment mode would be in the interest of both the insured as well as insurer.

As according to business policies these insurance companies charge more if the premium in lieu of the policy is paid either monthly, quarter or semi-annually. The additional amount is charged on account of banking related cost and processing fees that the insurance companies have to incur every time the premium is paid by the policyholder. So, in case you have opted a monthly payment mode for your policy, you'll end up paying approximately 8-10% higher than you would have paid in annual mode.

For instance, a person of 26 years age opting for LIC endowment plan no. 14 for a minimum cover of Rs 50,000 for a term of 15 years would need to pay Rs. 3407 in annual mode, Rs. 1730 in half-yearly mode, Rs. 878 in quarterly mode or Rs. 307 in monthly mode. So, in the monthly payment mode, policyholder would end up paying Rs. 277 more (307*12).

Administration of the policy in case of annual premium payment mode is quite simple and one needs to remember just one renewal date in case of annual premium mode. So, the probability of non-payment of the premium amount and hence the chances of policy lapse are reduced considerably. Opting for annual mode thus saves the policyholder or insured of additional charges and formalities that need to be done in order to reinstate the policy.

Also, other premium payment modes are often linked to electronic clearing service or ECS and you need to ensure that your bank account maintains the balance in respect of the policy premiums. In case of default, payment of premium turns out to be cumbersome.

For the insurer timely payment of the premium by the insured reduces the operational costs and time as then insurance companies would be spared from sending reminders to their customers for payment in respect of the insurance policy. Historical data with the insurance company suggest that renewal of policies is far better in annual payment mode than in other modes.

So, opting for annual premium mode would be in your own interest as over the term of the policy it will save you money and also do away with the hassles associated with other premium payment modes.

Story first published: Thursday, September 26, 2013, 14:56 [IST]
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