Description of APR Calculator for Fractional (Modal) Premiums

You usually can choose among several modes for paying premiums, and you can change from one mode to another by contacting your insurance agent or your insurance company. Premiums usually may be paid annually, semiannually, quarterly, or monthly. When premiums are paid more often than annually, the insurance company usually adds extra charges to cover its costs and in some cases to earn a profit on the arrangement. This calculator shows the extra charges per year expressed as an annual precentage rate (APR) and in dollars.

To use the calculator, you must have the policy's annual premium and the fractional (modal) premiums in which you are interested. The information can sometimes be obtained from a premium notice or from your policy. If you cannot obtain the information from either of those sources, contact your insurance agent or your insurance company for the information.

Significance of the APR: If the APR for a fractional premium arrangement is substantially higher than the annual interest rate on your savings account, you would gain financially by withdrawing money from the account to pay the annual premium and replenishing the account during the year. If the APR for a fractional premium arrangement is substantially higher than the APR on a loan, you would gain financially by taking a loan to pay the annual premium and repaying the loan during the year.

Caution: Do not divide the extra charges by the annual premium. That procedure does not reflect the timing of the premiums, and substantially understates the APR. For example, if the annual premium is \$1,000 and the quarterly premium is \$270, the four quarterly premiums in a year would add up to \$1,080, and the extra charges would be \$80. If you divide \$80 by the annual premium of \$1,000, the result would be 8%. That is not the APR. The APR, as the calculator shows, is 21.5%!

Further Information: For further information, please refer to our November 2004 issue. Click here for our listing of back issues.