For traditional insurance policy, the life assured can either pay yearly, half-yearly, quarterly, or monthly.
If the yearly premium is RM1000/year,
the monthly premium = RM1000 x 1.05/12 = RM87.50 (total 5% extra)
the quarterly premium = RM1000 x 1.03/4 = RM257.50 (total 3% extra)
the half-yearly premium = RM1000 x 1.02/2 = RM510.00 (total 2% extra)
If we want to compare the interest rate with Fixed Deposit Rate or Home-loan daily rest rate, we need to calculate the effective annual rate (EAR). It can be calculated using the Financial Calculator.(I use HP 10B)
Let’s start with the monthly premium
Payment mode = 12 times per year, use the BEGIN mode
N=12
FV=0
PV=1000
PMT= -87.50
Calculate i = 10.80% (effective annual rate)(EAR)
Try to calculate the other payment mode:
Quarterly EAR = 8.03%
Half-yearly EAR = 8.16%
If we can’t afford to pay yearly, it is better to opt for quarterly rather than half-yearly.
If you are confident to make an investment return of more than 10.8% a year, it is better for you to pay your premium monthly even though you can afford yearly premium.
Every sen kept and saved will still make you richer by one sen!
