What Does an Annual Premium Mean?

Reading insurance contracts carefully is important to understanding your policy.

An annual premium is a fee paid to an insurance provider in exchange for a one-year insurance policy that guarantees payment of benefits for certain covered events. Some insurers require annual premium payments, but others offer several payment options from which policyholders can choose.

Insurance Basics

Home, auto, life, disability, health and dental are some of the more common types of consumer insurance policies. Businesses also obtain coverage for buildings, liability and inventory protection. Insurance is a transfer of risk whereby the insured pays a premium cost to the insurer and the insurer takes on the burden of paying on contractually covered events. This helps protected individuals and businesses from potential financial ruin.

Payment Options

Many insurers do offer multiple premium payment options. You often can pay monthly, quarterly, semi-annually or annually. Typically, you have incentives to pay annually or for longer periods. Some insurers charge processing fees for shorter-term payments because of their costs in invoicing and processing payments. Others do not charge such fees but offer 5 percent to 15 percent premium discounts to those who pay annually. This is an incentive to lock you into your policy for a longer period.

Drawbacks

The major drawback of an annual premium insurance policy is that you pay a larger amount at once. This affects your cash flow when payment is due. If you have the option, you should weigh the savings of paying annually against alternative uses of the money over time. Generally, if you can afford the single payment and do not have an investment opportunity that pays a higher rate of return than you get from the annual discount, it is wise to pay annually.

Other Insights

Pay your premiums on time to avoid possible late-payment fees and lapses in coverage. Should you cancel or change your policy during its term, the insurer usually refunds a prorated amount. You should clarify this with the insurer before buying the policy. For additional discount opportunities, consider combining multiple policies, such as home and auto, with one provider. This can also lead to a 10 percent to 15 percent savings with many providers.

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