Definition

Premium mode is the schedule on which premiums are paid:
- Annual: Once per year
- Semi-annual: Twice per year (every 6 months)
- Quarterly: Four times per year (every 3 months)
- Monthly: Twelve times per year (every month)

Standard Mode

• Annual is standard: Insurance pricing based on annual premium
• Other modes adjusted: Other frequencies calculated from annual
• Modal factors applied: Multipliers used to determine other modes

Annual Mode = Lowest Total Cost

Annual premiums cost least because:

1. Lower administrative costs:
2. One billing per year vs. 12 (monthly)
3. Fewer transactions to process
4. Less paperwork and postage

5. Reduced customer service needs

6. Investment income for insurer:

7. Receives full premium upfront
8. Can invest money immediately
9. Earns more investment returns

10. Time value of money favors insurer

11. Lower lapse rates:

12. Annual payers more committed
13. Less chance of missed payments
14. Better persistency for insurer

More Frequent Modes = Higher Total Cost

Monthly premiums cost most because:

1. Higher administrative costs:
2. 12 billings vs. 1
3. More processing expense
4. Electronic payment fees

5. More customer service calls

6. Lost investment income:

7. Premium received in smaller increments
8. Delayed receipt of funds
9. Lost time value of money

10. Opportunity cost for insurer

11. Higher lapse risk:

12. More opportunities to miss payment
13. Monthly budgets fluctuate
14. Higher administrative burden tracking payments

Modal Factors

Insurers use modal factors (or mode factors) to calculate premiums for different payment frequencies.

Definition: Multiplier applied to annual premium to get total annual cost for other modes.

Typical Modal Factors

Note: Exact factors vary by company and product.

Alternative Presentation

Some companies show as "load factors":

Method 1: Using Modal Factors

Formula:

Mode Premium = Annual Premium × Modal Factor

Annual Cost for Mode:

Total Annual Cost = Mode Premium × Number of Payments per Year

Examples

Example 1: Semi-Annual

Annual premium: $1,200
Semi-annual factor: 0.51

Semi-annual premium: $1,200 × 0.51 = $612
Total annual cost: $612 × 2 = $1,224
Extra cost: $1,224 - $1,200 = $24 (2% more)

Example 2: Quarterly

Annual premium: $2,400
Quarterly factor: 0.26

Quarterly premium: $2,400 × 0.26 = $624
Total annual cost: $624 × 4 = $2,496
Extra cost: $2,496 - $2,400 = $96 (4% more)

Example 3: Monthly

Annual premium: $3,600
Monthly factor: 0.0875

Monthly premium: $3,600 × 0.0875 = $315
Total annual cost: $315 × 12 = $3,780
Extra cost: $3,780 - $3,600 = $180 (5% more)

Method 2: Using Load Factors

Formula:

Total Annual Cost = Annual Premium × Load Factor

Mode Premium:

Mode Premium = Total Annual Cost ÷ Number of Payments

Examples

Example 1: Quarterly with Load Factor

Annual premium: $1,800
Quarterly load factor: 1.04

Total annual cost: $1,800 × 1.04 = $1,872
Quarterly premium: $1,872 ÷ 4 = $468

Example 2: Monthly with Load Factor

Annual premium: $4,800
Monthly load factor: 1.07

Total annual cost: $4,800 × 1.07 = $5,136
Monthly premium: $5,136 ÷ 12 = $428

Comprehensive Example

Policy with $2,400 annual premium:

Analysis:
- Monthly mode costs $120 more per year (5% premium)
- Over 20 years: $120 × 20 = $2,400 extra (one year's premium)
- Over 30 years: $120 × 30 = $3,600 extra

Long-Term Impact

$5,000 annual premium policy over 30 years:

Annual mode:
Total paid: $5,000 × 30 = $150,000

Monthly mode (5% load):
Annual cost: $5,250
Total paid: $5,250 × 30 = $157,500

Difference: $7,500 more for monthly over 30 years

Definition

Fractional premium: Premium for payment mode other than annual (fraction of year).

General Formula

Fractional Premium = (Annual Premium × Modal Factor)

OR

Fractional Premium = (Annual Premium ÷ Frequency) × (1 + Load Percentage)

Examples

Example 1: Quarterly Fractional

Annual premium: $3,000
Quarterly load: 4%

Method 1 - Direct calculation:
Quarterly base: $3,000 ÷ 4 = $750
With load: $750 × 1.04 = $780

Method 2 - Total then divide:
Total annual: $3,000 × 1.04 = $3,120
Quarterly: $3,120 ÷ 4 = $780

Example 2: Semi-Annual Fractional

Annual premium: $1,800
Semi-annual load: 2%

Semi-annual base: $1,800 ÷ 2 = $900
With load: $900 × 1.02 = $918

OR

Total annual: $1,800 × 1.02 = $1,836
Semi-annual: $1,836 ÷ 2 = $918

Automatic Payments

Many insurers offer automatic bank draft:
- Monthly convenience: Easier budgeting
- Reduced load: May offer lower modal factor
- No missed payments: Automatic withdrawal
- Lower lapse risk: Better for insurer and client

Typical EFT Discount

Without EFT:

Monthly modal factor: 0.0875 (8.75% of annual)

With EFT:

Monthly modal factor: 0.0850 (8.50% of annual)

Example:

Annual premium: $4,800

Monthly without EFT:
$4,800 × 0.0875 = $420/month
Total annual: $420 × 12 = $5,040

Monthly with EFT:
$4,800 × 0.0850 = $408/month
Total annual: $408 × 12 = $4,896

Savings with EFT: $144/year

Grace Period Premium

If insured dies during grace period with premium unpaid:

Death Benefit Paid = Face Amount - Unpaid Premium

Example:

Quarterly premium: $500
Death during grace period
Quarterly premium unpaid

Face amount: $250,000
Less unpaid premium: -$500
Beneficiary receives: $249,500

Pro-Rata Premium Returns

If policy surrendered mid-term:

Unearned premium may be refunded:

Refund = Premium Paid - (Premium Rate × Days in Force ÷ 365)

Example:

Annual premium paid: $1,200
Policy surrendered after 100 days

Earned premium: $1,200 × (100 ÷ 365) = $329
Unearned premium: $1,200 - $329 = $871
Refund: $871

Universal Life Monthly Deductions

Universal life typically uses monthly mode internally:
- Cost of insurance: Deducted monthly
- Policy fees: Charged monthly
- Premium can be any mode: But COI deducted monthly

Annual premium paid: $12,000 (deposited to policy)
Monthly COI charge: $150
Monthly admin fee: $10

Each month:
Charges: $150 + $10 = $160 deducted from cash value

Advantages of Annual Mode

Financial:
- Lowest total cost: Save 5-8% vs. monthly
- Better investment: Can invest savings
- No missed payments: One payment per year

Practical:
- Tax deduction timing: Single deduction (if applicable)
- Less paperwork: One transaction
- Set it and forget it: Annual reminder only

Advantages of Monthly Mode

Budgeting:
- Easier cash flow: Smaller monthly amounts
- Aligns with income: Monthly paycheck deduction
- Less financial strain: Spread cost over year

Practical:
- Easier to start: Lower initial outlay
- Automatic: Set up EFT and forget
- Young families: More manageable for tight budgets

Break-Even Analysis

Is monthly worth it?

Annual premium: $3,000
Monthly total: $3,150 (5% load)
Extra cost: $150/year

If invest monthly difference:
Monthly premium: $262.50
Annual divided monthly: $250
Difference: $12.50/month

Invest $12.50/month at 6% return:
After 20 years: $5,813

Annual mode saves: $150 × 20 = $3,000
Plus investment earnings: $5,813 - $3,000 = $2,813

Total benefit of annual: $2,813

Example 1: Young Professional

Situation: Age 28, tight budget, needs $500,000 coverage
Annual premium: $600

Option A - Annual mode:
Pay once: $600
Total cost: $600/year

Option B - Monthly mode (8% load):
Monthly: $600 × 0.09 = $54
Total: $54 × 12 = $648
Extra: $48/year

Recommendation: Monthly mode
Reason: $54/month easier to budget than $600 lump sum
Cost: Worth $4/month ($48/year) for convenience

Example 2: Established Family

Situation: Age 45, stable income, $1M coverage
Annual premium: $3,600

Option A - Annual mode:
Pay once: $3,600
Total: $3,600/year

Option B - Monthly mode (7% load):
Monthly: $3,600 × 0.0892 = $321
Total: $321 × 12 = $3,852
Extra: $252/year

Over 20 years:
Annual: $3,600 × 20 = $72,000
Monthly: $3,852 × 20 = $77,040
Difference: $5,040

Recommendation: Annual mode
Reason: Save $5,040 over policy life, can afford lump sum

Example 3: Payroll Deduction

Situation: Group policy through employer
Annual premium: $1,200
Payroll deduction: 24 paychecks/year

Semi-monthly: $1,200 ÷ 24 = $50/paycheck
No modal load (employer absorbs cost)

Benefit: 
- Convenient (automatic)
- No extra cost
- Pre-tax (if applicable)

• Annual mode = lowest total cost (standard pricing)
• Monthly mode = highest total cost (typically 5-8% more)
• Modal factor: Multiplier to calculate non-annual premiums
• Typical factors: Semi-annual (0.51), Quarterly (0.26), Monthly (0.0875)
• Why more frequent costs more: Administrative costs + lost investment income
• Load factor: Shows total annual cost as percentage (e.g., 1.05 = 5% more)
• EFT/PAC discount: Automatic payments may reduce modal load
• Grace period death: Premium deducted from death benefit if unpaid
• Fractional premium: Premium for mode other than annual
• Calculate total annual cost: Mode premium × number of payments
• Long-term impact: Monthly can cost thousands more over policy life
• Universal life: Uses monthly internal deductions regardless of premium mode
• Pro-rata refund: Unearned premium returned if policy surrendered
• Client decision: Balance convenience vs. cost savings