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Monthly vs Annual Premium Payment-Am I thinking about this right?

Home Personal Finance and Budgeting Monthly vs Annual Premium Payment-Am I thinking about this right?

  • Avatar CornTeeth 
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    Status: Dentist
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    Joined: 07/25/2019

    I know there are many out there that opt to pay annual premium for various insurance policies for some savings over monthly premiums.

    I have some insurances where it’d be a 5-10% discount paying annual vs monthly.  I recently just got quote for life insurance as follows:

    $104.05 monthly or $1209.88 annually

    According to my path ((104.05×12)-1209.88)/1209.88=.032 or 3%.  It seems like that’s not enough of a savings for me to pay for it up front.  Mathematically it would be better to just pay monthly and use the extra to pay off a student loan that’s at 4.5%.

    I know we’re only talking about $39 dollar and isn’t enough money to spend even more than 5 minutes thinking about it but it’s more of a mental exercise to make sure I’m thinking about stuff like this correctly.

    #237582 Reply
    childay childay 
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    Status: Physician
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    Joined: 01/09/2016

    Assuming you actually pay down the loan with said money, then yes you’re correct

    #237583 Reply
    Lordosis Lordosis 
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    Status: Physician
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    Joined: 02/11/2019

    Hopefully you don’t pay by check.

    “Never let your sense of morals prevent you from doing what is right.”

    #237591 Reply
    Faithful Steward Faithful Steward 
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    Status: Financial Advisor, Small Business Owner
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    Joined: 06/12/2017

    Your math is correct. However, not many folks have the discipline to use the savings to pay extra on the loans.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #237593 Reply
    Liked by CordMcNally
    CordMcNally CordMcNally 
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    Status: Physician
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    I know we’re only talking about $39 dollar and isn’t enough money to spend even more than 5 minutes thinking about it but it’s more of a mental exercise to make sure I’m thinking about stuff like this correctly.

    Click to expand…

    I typically make the same statement in similar threads about similar topics but I still stand by it. A high earning professional shouldn’t be making monthly payments on things like this. Again, is it technically the correct thing to do if you can make more money elsewhere or pay down higher interest debt? Yes. But, I always argue that it’s a mindset and financial habit issue.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #237599 Reply
    Avatar CornTeeth 
    Participant
    Status: Dentist
    Posts: 6
    Joined: 07/25/2019

    Yep absolutely agree with you.  This was just a mental mathematic exercise.  It’s interesting to me to think about where you would draw the line.  Is saving 3% a year by paying annually on a $1000 premium worth it?  I don’t think financially it really matters in this scenario and it’s better just to pay it off once/year so I can stop thinking about it but what if it’s 10% of $1000? 8% of $5,000?   3% of $10,000?

    I’ve always loved reading people comments just to see what their train of thought is that led to the conclusion.

    Appreciate everyone’s thoughts.

    #237621 Reply
    Lordosis Lordosis 
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    Status: Physician
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    Joined: 02/11/2019

    With minor differences and small amounts convenience takes precedent for me.

    “Never let your sense of morals prevent you from doing what is right.”

    #237624 Reply
    Liked by Zaphod
    ENT Doc ENT Doc 
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    Status: Physician
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    Joined: 01/14/2017

    I disagree with your math.  You are not accounting for the time value of money.  Those cash flows are coming in at different times.  If you put the net cash flow payments into a XIRR formula your hurdle rate is 7.1%.

    #237627 Reply
    Avatar CornTeeth 
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    Status: Dentist
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    Joined: 07/25/2019

    Can you run me through how you set up your XIRR function as I’m not familiar with it.  I’m sure your way is more elegant to do the calculation that I’m attempting to do but if the money is going towards paying off debt at a higher % return shouldn’t the time value of money be accounted for there as well?

    #237639 Reply
    ENT Doc ENT Doc 
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    Can you run me through how you set up your XIRR function as I’m not familiar with it.  I’m sure your way is more elegant to do the calculation that I’m attempting to do but if the money is going towards paying off debt at a higher % return shouldn’t the time value of money be accounted for there as well?

    Click to expand…

    No.  You have to compare apples to apples yields.  The yield you calculated for the comparison of payments vs your student loans are not in the same terms.  You need to compare annualized returns (APY).

    In Excel, set up a column of dates (dd/mm/yyyy) where the net cash flows are occurring.  Next to this column write the net cash flows.

    Formula is:

    =XIRR(values,dates,guess)

    highlight the column of net cash flows, then the column of dates, then put a random guess – say 0.03 for 3%.

    #237654 Reply
    Avatar CornTeeth 
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    Status: Dentist
    Posts: 6
    Joined: 07/25/2019

    Would I use (1209.88) as the “initial investment” and use 104.05 on the first of every month thereafter for a period of 12 months?  Thanks for taking the time to explain.

    #237684 Reply
    ENT Doc ENT Doc 
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    Status: Physician
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    No.  Initial NET cash flow would be -(1209.99-104.05).  You have to compare one realty to the alternative reality with respect to cash flows.  The remaining amounts for the following 11 months will be +104.05.

    #237689 Reply

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