Paying for insurance monthly? You’re paying too much

It’s a little-known fact that insurance companies charge more to policy holders who pay monthly than those who pay annually. In general, monthly payors pay 7% to 9% more.

Why do Canadians voluntarily choose the more expensive option? And which option should you choose? 

It’s all in the pitch 

For the insurance agent, the pitch is obvious. 

“Mr. and Mrs. Prospective-Client, for $150 per month you can protect against one of your most significant financial risks.” 

Mr. and Mrs. P-C consider the cost and can visualize being able to afford the extra monthly expense easily, or with modest lifestyle spending adjustments.  The P-Cs are onboard. 

What if the agent says: 

“Mr. and Mrs. Prospective-Client, for $1,650 per year you can protect against one of your most significant financial risks.” 

Now Mr. and Mrs. P-C consider the cost and see that it’s on par with the cost of their annual vacation or holiday season budget. Not to mention, they may not have an extra $1,650 sitting in their bank account. 

Now, they question whether they need as much insurance as is recommended. Or even question the likelihood of experiencing the risk (death, disability, critical illness), and choose not to insure at all. 

Even though the annual option is $150 less per year than the monthly pay option. Yes, that’s right. To the customer, the more expensive option feels more affordable than the less expensive one.  

What would a more client-centred pitch sound like? 

There’s a way to ensure that you the client pay the least amount for the coverage you need. Here’s how it works: 

1. The agent presents the cost of the policy as a monthly figure, the annual premium/12.  Using the previous example, the monthly cost would be $1650/12 or $137.50. 
2. Advise the client that, when taking on an insurance policy on an annual pay basis, they must pay the first year’s premium up front. However, this is only true the first year, as long as …
3. … You the client establish an automatic monthly transfer from your bank account to a high interest savings account. When you receive your second and following annual premium notices, the money will be there to pay it. Essentially, you are paying yourselves monthly, instead of the insurance company, and pocketing the savings.  Better yet, since you were probably comfortable with the $150/m premium you would have paid monthly, you can set your automatic savings to $150, and the savings will accumulate in your hands.
4. This initial fiscal discipline sets you up for a lifetime of savings. To look at it another way, if someone offered you a guaranteed 9% return, wouldn’t you jump at the opportunity?

Which one should you choose? 

Before you decide, here’s the one big caveat. If you ever miss paying your annual premium because you didn’t save throughout the year, or you got busy with other things and overlooked your premium notice, or you moved and didn’t notify the insurance company of your change of address … you run the risk of the policy lapsing. Most insurance companies offer a 30-day grace period for late payment, but beyond that the policy will lapse and reinstatement may not be possible.  

So! If you are somewhat of a scatterbrain about bill-paying or paperwork? You might want to choose the monthly payment; it offers more protection against the policy accidentally lapsing. 

For everyone else, consider contacting your insurance agent and asking about switching to annual payments. That phone call could earn you as much as 9% per year, ongoing, on all your policies.