There are countless of insurance types in the market. No matter what imaginable risk you may have to transfer to a third-party, finding a counterparty in the open market who is willing to takeup that risk is actually a piece of cake.
However, have you ever wondered why even for 2 similar product types that seemingly serves the same purpose, the costs (or in our case, the premiums) can differ so much in reality?
To be honest: Before I had even seriously spent time to understand the costs difference, I had several misunderstandings and assumptions. One was that premium costs difference was just to pay higher commissions to insurance agents. Another was that cheaper insurance types/plans means they were less popular and thus a warning sign to be wary of them when buying.
A quick research showed that the costing of the different insurance types was more than what we see at the surface.
Without dwelling too much on the technical details, premiums are generally higher for:
Life insurance versus General insurance
| Parameters | Life Insurance | General Insurance |
| Coverage | Covers life | Covers non-life assets |
| Contract term | Long-term contract Premiums for several years | Annual contracts Renewable each year |
| Payment of claim | Payable on death or policy maturity | Reimbursed during eventuality |
| Savings component | May be present | Absent |
Generally, life insurance is meant to insure the policyholder against death, therefore the assurance of certain amounts of death benefits payout. Premiums for general insurance are usually pro-rated or reimbursed on death.
Life insurance include term/whole life, endowment, investment-linked plans (ILP).
General insurance include health (hospitalisation, personal accident, critical illness), motor vehicle, home, travel.
Whole Life versus Term (Early years of life)
As whole life policies aim to build up a cash component, it takes time for the cash component to accumulate and break-even figures usually occur near the end of maturity. Term life has no cash components and can be cancelled or lapsed at any point in time with no further loss to the policyholder.
Term versus Whole Life (Later years of life)
As individuals age, the chances of death and claiming of death benefits get increasingly higher. Term life is a bet against you dying by the insurance company. This is why term life gets more expensive the older you get, e.g. 70 – 99 years old.
As whole life policies has built up a large cash component by this time, the cash component serve to continue making your insurance premium level. This is why Whole Life “is cheaper” during this period of time. This is also the same for Limited Premium Payment (LPP) Whole Life which builds up a large cash component early in life.
Regular premiums versus one-time premium
One-time premium allows the policyholder to begin accumulation of the cash component right from the start. Because the insurance company gets hold of all the funds from policy inception, it is therefore willing to reduce the deductibles or cost to consumers for one-time premium.
Regular premiums versus Limited Premium Payment (LPP)
Similar to the above. For the same total premiums paid, because the insurance company gets hold of all the funds in a shorter period of time, it is therefore willing to reduce the deductibles or cost to consumers for shorter term policy.
Longer policy term versus shorter policy term
Similar to the above. For the same total premiums paid, because the insurance company gets hold of all the funds in a shorter period of time, it is therefore willing to reduce the deductibles or cost to consumers for shorter term policy.
ILP > (Whole life, Endowment, Term) > Health > (Motor vehicle, Home, Travel)
The way ILPs are structured is to potentially give higher returns as compared to whole life and endowment, thus the higher cost. Whole life is expected to remain in force for the insured lifetime as compared to endowment with a shorter tenor of commonly 15, 20 & 25 years. Term insurance has no cash component and is strictly in force for a specific period of time with the option to cancel. Health insurance has no cash component premiums are reimbursed on death. Motor vehicle, home and travel are usually lower valued and may be ad-hoc or required less frequently.
Conclusion
By being aware of the difference in premiums, you may get a better appreciation on why some types of insurance polices are more expensive than others and be less prejudiced while making an informed decision.
BONUS Question: Some insurance types allow you to pay your premiums on a regular basis such as monthly, quarterly, semi-annually or annually.
Which option should you select and why?
For most insurance policies, your choice of premium frequency should be on an annual payment mode if possible. By comparison, the monthly, quarterly or semi-annually insurance premium is higher than annual payment mode. This is due to the administrative charges imposed by the insurance company. The additional cash paid does not contribute to your surrender or cash value. While the difference between the different payment modes may seem small (from 1 to 4%), it adds up over the long run. As a simple illustration below:
| Frequency of payment | Cost of premiums |
| Annual | 96% (4% discount on annual basis) |
| Semi-annual | 97% (3% discount on annual basis) |
| Quarterly | 98% (2% discount on annual basis) |
| Monthly | 100% |
For Investment Linked Plans, your choice of premium frequency should be on a monthly payment mode to carry out Dollar Cost Averaging (DCA). Your investment funds are purchased every month when your premium is processed and price will be of different prices as fund prices fluctuates. This enables you to do DCA over the long run in times of market boom or flop.
On a flip side, an annual payment mode is less preferred as your investment funds are purchased yearly on the month of deduction of your premium and could prove detrimental to long-term returns, especially when markets are at their peak or all-time high.
Theory of Constraints 
Your understanding of DCA is inaccurate. There is no definite right way to invest on DCA. Sometimes annual premiums will perform better, sometimes monthly will perform better. The whole idea is to invest long term, perform rebalancing, and choose funds with good fundamentals
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You are correct in that an investor who DCA decides on two parameters: the fixed amount of money invested each time, and the time horizon over which all of the investments are made. With a shorter time horizon, the strategy behaves more like lump sum investing.
However, a year in my opinion is too long and is more akin to a “lump sum investment” due to its large sum involved. Where do we cut the line? Is investing every 2 years considered DCA? Every 5 years?
DCA is usually done in the time frequency of weekly, monthly, bi-monthly. I stand corrected on this. Opinions?
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That is flawed thinking. There are too many changes in terms of outlook, fund portfolio, etc when u stretch your regular investments by that much.
If you don’t believe what I say about there being no definite right or wrong when it comes to monthly or annually for DCA, take a random sample of 10 funds and run a simulator on them. They will give you varying results. Investing on an annual basis gives your funds more time to perform better when market is buoyant, while on the other hand, if market sentiments aren’t as strong, it allows you to hedge your purchase price.
Conclusion, when you invest long term, annually or monthly doesn’t matter.
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I am interested in digging out more from you. I don’t think I have put it across a right or wrong but which frequency is a better strategy.
Unlike regular investment such as buying into stocks and shares, you don’t get to choose a specific date to exercise it when you are buying into units for ILP. It is set on a fixed date every year or when your premiums are due. This is the issue.
If you were investing in stocks and shares annually, I am interested to know if you will buy in next year on the exact same date? Or July instead of October? or the 10th instead of the 31st (last day) of the month?
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Exactly. There is no better strategy between annual and monthly.
DCA is based on removing your emotions and investing on a regular basis. If you have to come up with so many scenarios, that’s fundamentally wrong.
You can’t DCA in small amounts on shares, so that should not be in the equation.
Like I said, try a simulator on 10 random funds.
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Thanks much appreciated, I shall give it a try.
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Still Interested to know how “for the same input data and conditions” the premiums vary wildly- even for something as Vanilla as a term plan. I ran a DIY simulation on the Compare website and the premiums vary over 30-40% .. all things remaining same.
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Your guess is as good as mine. Without knowing the technicalities backend and how the actuaries calculate, it is hard to know why. But I am highly interested to know as well.
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Same is not always the same. Comparefirst lacks many variables and many insurers put their most basic coverage that may not even be popular on the site. Some terms are not clearly stated. You won’t find early CI and other types of coverage on the site. At the end of the day, price comparison can only yield you the bare minimum benefit of saving money today.
A Mercedes and Proton does the same thing of transporting you to your destination, yet most people will choose the Mercedes if they can afford it. Image aside, the comfort and the peace of mind that you have a higher chance of survival in an accident while in a Mercedes, cannot be compared in monetary terms.
Do you want your family to be searching around for the countless policies you have with multiple insurers which might even have been sold? Spend months to track down the claims process? All these after you spent days and months comparing for that small difference in premiums.
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Agreed on the same same but different different example. On a side note, a savvy person should do up a proper will early in life to designate beneficiaries, or do up proper insurance nominations and leave behind instructions on the difference insurances he has.
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No doubt a will is important, so is nominating beneficiaries. But having a will and having nominated beneficiaries does not mean that the payouts will automatically be paid out to each beneficiary upon the death of an individual. Furthermore, most people even if they get a will done by a lawyer, fail to get a specialized lawyer in the preparation of the will.
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Totally agree on this. Some people think far, but they fail to execute the end-to-end process perfectly.
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