Let’s understand this with the help of an example. Mr X, a 29-year-old male has invested in Unit Linked endowment plan and pays the premium of ` 30,000 through annual mode. In this scenario, his fund value will be ` 4, 08,546 at the end of Policy Term of 10 years at assumed rate of 8% per annum. Now, if he opts for the monthly premium payment mode and pays ` 2,500 per month, his annual premium of ` 30,000 still remains the same.
In this case, the fund value after the policy term of 10 years @ assumed rate of 8% will be ` 3, 96,348. This difference of ` 12,198 in annual and monthly mode is observed because in the monthly mode the same premium amount is received by the company over an extended period which in turn leads to lower fund accumulation. Hence, in the monthly mode the premium grows at a slower rate and this, in turn, results in the Company receiving lower charges as compared to annual premium payment mode. Therefore, in all modes except annual, we are required to increase the minimum modal premium.