No Medical
life insurance
- life insurance modal factors
How you pay affects how much you pay with life insurance
If you look through a term life brochure, you're likely to see the term
modal factor.
It's one of those life insurance terms that is perplexing and sounds like it
comes from a science fiction movie.
It's important to understand the term however since it can affect how much
you pay for life insurance.
Let's take a quick look at modal factors.
Depending on the life insurance company, you typically have various options
on how you can pay your life insurance premium and we're not just talking about
auto-deduction, credit card, or standard billing.
You also have options on how often during a year you will pay your premium.
When you run your term life insurance quote, the rates normally reflected
there assume you are paying your premium on an annual basis.
You may have options to pay the premium over shorter durations such as
monthly, quarterly, bi-annually, etc.
This is what dictates the modal factor.
The modal factor is usually a percentage.
For example, it may look something like this:
- Semi-annual =
.51 (8.2% APR)
- Quarterly =
.26 (10.8% APR)
- Monthly =
.0875 (10.8% APR) Pre-arranged withdrawals only)
This essentially means that you will pay more per year if you pay at a
smaller installment than annually.
Let's take an example.
Let's say your annual premium is $1000 (to make it easy).
If you choose to pay semi-annually (every 6 months), then we would apply 51%
of the $1000 annual charge.
In this case, you would pay $510 twice during the year.
This means you are paying a total of $1020 for the year for an
additional premium of $20.
This modal factor is essentially a 2% penalty for paying twice a year instead
of annually.
The penalty goes up for shorter durations.
Taking our same example of $1000 annual premium, if we pay quarterly, then we
would pay a 4% penalty (26%+26%+26%+26%).
In this case, we are paying an additional $40 on the $1000 premium.
The penalty for monthly is steeper.
If we multiply the .0875 modal factor by 12, it amounts to a 5% extra
premium.
That means, we are paying $1050 versus the annual premium of $1000.
Of course these shorter durations are not only easier on the pocketbook but
can be more convenient when paid with automatic withdrawals or credit card
debits.
You can run your quote here:
Why do you have to pay more via these modal factors for life insurance?
Keep in mind that life insurance is a pre-paid policy which means you are
paying now for the next year (or quarter or 6 month depending on payment
schedule).
A big part of how a life insurance company functions is to take the premium
now and invest part of it to offset future claim payments.
The modal factors simply reflect the loss of income from investment that the
carrier forgoes by premium not being received.
For example, if you pay $1000 up front, the carrier can invest part of
this to make an additional 4% conservative.
If you pay twice a year, the carrier can only invest $500 for the first
6 months.
To offset the 6 months investment income on the second payment, they charge
you the modal factor.
The monthly payment cycle means that they can only invest 1/12th of the
premium amount for the first months and 2/12ths in month 2 etc.
This figures into the 5% penalty in our example above.
Ultimately, it's up to you and your comfort level.
If you can financially manage it, you will pay less by paying the annual
amount.
You need to weigh this savings versus the convenience and budgeting ease of
paying smaller amounts more frequently.
Either run a
term or no-medical life quote, talk to an expert at 800-710-0455, or
email us!
Again, there is absolutely no cost to you for our services. Call
800-710-0455 Today!