Does your financial adviser have your best interest at heart?
To secure a larger overall yearly premium, some financial advisers or insurance agents may have told you to make insurance premium monthly. This allows for easier closure of a higher total premium, resulting in a higher overall commission. You may have intended to set aside a yearly lump sum financial budget of S$5,000, but got convinced to set aside S$500 on a monthly basis.
A higher total premium also allows them to achieve more production points towards any sales incentive campaigns they are entitled to. Compare forking out S$500 a month, as to S$6,000 in a single payment. You get what we mean, don’t you?
Investment Linked Policy (ILP)
An Investment Linked Policy is a life insurance plan that is made up of 2 components: An Insurance policy which provides you protection, and an investment portion which gives the policy its cash value. The cash value of the policy comes from the investment units in the Unit Trust Fund(s) you invested into. For Investment Linked Policy, always choose monthly premium payment to maximise on getting the average long-term growth of the Unit Trust sub-funds you are invested into. This is also known as Dollar Cost Averaging.
- When you pay premium monthly – Your investment funds are purchased every month when your premium is processed. The price you are paying for your investments will be of different prices as the fund prices fluctuate on a daily basis. This set up a dollar cost averaging effect in the long run.
- When you pay premium yearly – Your investment funds are purchased yearly on the month of deduction of your premium. This is very detrimental to your long-term returns, especially when the financial market is at its peak or all-time high.
Even if you can afford a yearly premium option, go monthly for your Investment Linked Policies.
Read about: Investment Linked Policy: How does it work?
Read about: Investing Guide: Unit Trust Funds
Your adviser receives a lump sum remuneration or commission when the premium is paid yearly, compared to over a 12 month period when you pay monthly. Due to this difference, most of the advisers will recommend yearly payment when it comes to making an insurance premium.
As of this writing at 27/6/2023, the financial market is averaging around an all-time high. You do not want to have your lump sum premium used to purchase your investment units now, only to have the market corrects over the next few months.
Remember this: There are no differences in the insurance premium paid for your Investment Linked Policy, be it monthly or any other frequency of payment. Always opt to pay your insurance premium for Investment Linked Policy on a monthly basis.
Read about: Investment Linked Policy: Why it may not be the best option
All other Insurance Policies
For all other insurance policies, make your insurance premium on a yearly payment mode if possible. If you already have any Life Insurance policy, take out your contract and look at the benefit illustrations. You will notice that the monthly, quarterly or half-yearly insurance premium paid is higher than if you pay on a yearly mode. This is due to the administrative charges imposed by the insurance company.
Read about: Life Insurance Policies
There is usually a 2 to 2.5% difference between paying your insurance premium on the different payment modes. While a 2% to 2.5% difference may not seem like much, especially if your premiums are small. In the long run, it really adds up and that is without taking future value into consideration. This also takes into consideration that the financial returns from Endowment policies are not some of the highest available.
Looking for more information about the mechanics of an endowment plan? Here we break down how Endowment and Saving Policy works.
Not sure if an endowment/saving policy is for you? Find out here if an Endowment/Savings Policy is the best option for you for saving toward your financial goals.
If in doubt, remember the following
With the exception of Investment Linked Policy, always pay your insurance premium on a yearly basis so as not to incur administrative charges. The additional cash paid does not contribute to your surrender or cash value.
You can change your premium payment frequency by downloading the relevant change of premium forms at the insurance company website.
Speaking of which, how are the financial goals you set for 2023 working out so far?
Wish to know more about managing your Financial portfolio?
Read about: Managing your Investment Portfolio
Read about: Managing your Insurance Portfolio
Contact us should you require additional information and we will get back to you on your questions as soon as possible.
