What Is a Life Insurance Premium?
A life insurance premium is the money you pay to an insurer in exchange for policy coverage. Many policies allow you to pay premiums monthly, quarterly or yearly. In order to prevent a lapse in coverage and ensure that your beneficiaries receive the death benefit, it’s important to select a life insurance policy with premiums you can afford.
- Written by Rachel Christian
Rachel Christian
Financial Writer and Certified Educator in Personal Finance
Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.
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Lee Williams
Lee Williams
Senior Financial Editor
Lee Williams is a professional writer, editor and content strategist with 10 years of professional experience working for global and nationally recognized brands. He has contributed to Forbes, The Huffington Post, SUCCESS Magazine, AskMen.com, Electric Literature and The Wall Street Journal. His career also includes ghostwriting for Fortune 500 CEOs and published authors.
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Eric Estevez
Eric Estevez
Owner of HLC Insurance Broker, LLC
Eric Estevez is a duly licensed independent insurance broker and a former financial institution auditor with more than a decade of professional experience. He has specialized in federal, state and local compliance for both large and small businesses.
Read More- Published: October 12, 2020
- Updated: June 22, 2023
- 4 min read time
- This page features 11 Cited Research Articles
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Understanding Life Insurance Premiums
Premiums are payments you make to your life insurance company.
How much your life insurance policy is worth is called the death benefit. This is the payout your beneficiaries receive from the insurer if you pass away while the policy is in effect.
When considering the types of life insurance and the costs, term life insurance is almost always cheaper than permanent life insurance.
For example, premiums for whole life coverage — a type of permanent life insurance — cost about five to 15 times more than premiums for term life coverage.
Term life insurance lasts a specified period, such as 10, 20 or 30 years. You are required to pay premiums for the duration of that period.
On the other hand, permanent life insurance never expires, so long as premiums are paid. This means you’re likely to pay premiums for the rest of your life.
Life insurance premiums can be paid monthly, quarterly or yearly.
Monthly premiums are common, but life insurance companies often offer discounts to customers who pay annually. This can save you between 2 percent and 8 percent each year on your premium costs.
How Premiums Are Calculated
Your premiums are set by the insurer. Many factors contribute to the price you pay.
- Type of policy (term life or permanent life)
- Term length
- Coverage amount
- Your health, credit score and other factors
- Your age
- Riders
As you may expect, your health plays a crucial role in calculating premiums.
Younger, healthier people are less likely to die in the near future and are therefore less risky to insure. That’s why companies charge some people lower premiums than others.
Life insurance companies use a process called underwriting to gather information on you and calculate your cost.
Information like your personal and family health history, your lifestyle and medical exam results are all considered when establishing premiums.
Risk factors like smoking or chronic health conditions can result in higher premiums.
According to Forbes, insurers can also use third-party sources to learn about your prescription history, driving record and previous insurance applications.
The cost of premiums is also influenced by specific aspects of the policy itself.
For example, policies with large death benefit payouts are associated with higher premiums. A policy worth $500,000 will cost more per month and per year than a policy worth $100,000.
For term life insurance, longer terms also come with higher premiums. A 30-year term, for instance, will cost more than a 10-year term.
Types of Premiums
Once a policy is signed, your premiums usually remain stable. However, certain types of policies, such as renewable term life insurance, may be associated with premiums that change over time.
- Fixed
- Most often associated with whole life insurance, fixed premiums set a specific price that lasts your entire life. They are also known as guaranteed premiums.
- Flexible
- Some universal life insurance policies offer flexible premium options, as long as there is enough cash value to keep the policy from lapsing. Flexible premiums allow you to skip payments or adjust the size of premium payments over time. Payments are subtracted from your policy’s cash value to cover the cost. It’s important to note that universal life insurance premiums may increase over time if the policy does not include a premium guarantee.
- Level
- Level term life insurance is the most-sold type of term life insurance. Once underwriting is complete and your application is approved, you lock in your level premium for the entire term. Your premiums can’t increase — even if you become sick or develop a critical illness.
- Renewable Term
- Annual renewable term life insurance offers a one-year term, and each year that the policy is renewed, the premiums become increasingly higher.
FAQs
Life insurance companies customize your premiums based on the medical underwriting process and many other factors.
Once a premium price is offered to you, it’s almost impossible to haggle a lower rate. That being said, it’s still a good practice to shop around and get quotes from multiple insurers to make sure you’re getting the best deal to reduce your costs.
The older you are when you first apply for a policy, the more you will pay for coverage. For example, premiums are more expensive if you purchase a policy at age 50 than at age 30.
If you select a policy with a level or fixed premium, your premiums will not increase as you age because your rates are locked in. If you purchase a 30-year level term life insurance policy at age 30, you will pay the same premiums until your coverage expires at age 60.
- Member of the Association for Financial Counseling & Planning Education
- Certified educator in personal finance
- Former member of the American Finance Association
11 Cited Research Articles
- Shelton, S. (2020, September 24). How Does Life Insurance Work? Retrieved from https://www.usnews.com/insurance/life-insurance/how-does-life-insurance-work
- Danise, A. (2020, September 10). Types Of Life Insurance Policies. Retrieved from https://www.forbes.com/advisor/life-insurance/types/
- National Association of Insurance Commissioners. (2020, September 3). The Center for Insurance Policy and Research: Life Insurance. Retrieved from https://content.naic.org/cipr-topics/life-insurance
- Huddleston, C. (2020, April 17). How No-Exam Life Insurance Works. Retrieved from https://www.forbes.com/advisor/life-insurance/no-exam/
- Cummins, B. (2020, February 18). The Facts About Life Insurance Premiums. Retrieved from https://www.iris.xyz/viewpoints/facts-about-life-insurance-premiums/
- CNN Money. (2017, March 24). Life insurance: Types of life insurance policies. Retrieved from https://money.cnn.com/pf/money-essentials-life-insurance-policies/index.html
- Creswell, J. & Walsh, M.W. (2016, August 13). Why Some Life Insurance Premiums Are Skyrocketing. Retrieved from https://www.nytimes.com/2016/08/14/business/why-some-life-insurance-premiums-are-skyrocketing.html
- Insurance Information Institute. (n.d.). What are the principal types of life insurance? Retrieved from https://www.iii.org/article/what-are-principal-types-life-insurance
- National Association of Insurance Commissioners. (n.d.). Life Insurance. Retrieved from https://content.naic.org/consumer/life-insurance.htm
- New York State Department of Financial Services. (n.d.). Life Insurance: Types Of Policies. Retrieved from https://www.dfs.ny.gov/consumers/life_insurance/types_of_policies
- Protective Life Corporation. (n.d.). Understanding the different types of life insurance. Retrieved from https://www.protective.com/learn/types-of-life-insurance
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