Life Insurance

What Is A Life Insurance Premium?

Jul 22, 2018
Mother and daughter sitting on the ground with laptop
You pay the insurance company a fee in exchange for the peace of mind that comes with knowing that if you die, your loved ones will be better-taken care of financially. The life insurance premium is the agreed-upon amount you pay at regular intervals for this guarantee.

You can choose to pay your life insurance premiums monthly, like many of your other bills. Some insurance companies offer a discount if you agree to pay the entire years’ worth of premiums upfront. Paying your life insurance premiums annually could save you as much as 10%.

Life insurance is one of the few things you’ll buy that you hope goes unused. Before it can do you much good, you’ll need to die. This is especially true with term life insurance, which is the most inexpensive and straightforward option among all types of life insurance.

The insurance company carries the risk that you’ll die and they’ll have to pay a large lump sum of money to your beneficiary. In exchange for this service, you pay your life insurance premiums in full and on time.

Failure to do so will eventually cause your life insurance policy to lapse, which means that the insurance company gets to keep all the money you’ve paid them in the past, but they no longer have to pay the benefit amount if you die.

You’ll pay premiums for many types of insurance over the course of your lifetime. Term life insurance isn’t much different from auto insurance, homeowner’s insurance, or rental insurance. You pay the premium, and the insurance company assumes the risk that you’ll make a claim and they’ll have to pay it.

How Does A Life Insurance Company Determine Your Premium?

There are many factors that help insurance companies calculate your premium amount. Even though most life insurance companies use similar factors to determine premiums, the amount you pay for the same insurance policy from one company to the next may vary.

Insurance companies use statistics about life expectancy, lifestyle, health, and driving records to create actuarial tables that help them quickly estimate how long you may live. They also have mortality and sickness tables that help them determine their odds of paying a life insurance claim.

Individual companies also factor in their own rate of return on investments and take into consideration their total financial picture when they calculate premiums. All this information combined provides valuable information about how much money the company will need to charge an individual, so the company can stay profitable.

Getting A Quote For Life Insurance

A quote is an estimate of what your premiums will be. The insurance company takes into consideration the information you offer about your age, health status, lifestyle, and occupation. Using their actuarial tables and recent statistics, they estimate what the amount of life insurance you want may cost you.

A life insurance quote may differ from the actual premium you’ll pay, however. To determine the premium, the insurance company will walk you through their underwriting process. This involves collecting more specific data about you and your life.

You can get quotes from more than one company since they aren’t legally binding. It’s in your best interests to provide accurate and truthful information when asking for life insurance quotes.

Term Life Insurance Premiums

You pay the premium to keep your term life insurance policy in force for a predetermined amount of time. For example, a 30-year-old man may purchase a $500,000 life insurance policy with a term of 20 years.

If he pays the quarterly premiums on time and dies during the 20-year term of the policy, the beneficiary he named will receive $500,000. If he is alive when the policy expires, he may be able to convert the policy to a permanent one for a much larger premium. Or, he could simply let the policy go and he won’t have to pay the premiums.

Hopefully, he’ll be much more financially stable at age 50 than he was at age 30. If he dies after the policy expires, he should have more than enough money saved to pay for his funeral and burial costs as well as future financial support for his loved ones.

Term life insurance premiums don’t change over time. When you get a quote for a term life insurance policy, you can plan to pay that price for the entire term.

Whole Life Insurance Premiums

This type of life insurance is a lot more expensive than term life insurance. It works like term life insurance in that if you pay your premiums on time, your beneficiary receives the face value of the policy. There’s also a savings part that allows whole life insurance to serve as an investment.

If you plan to buy whole life insurance, there are a few things about the premiums that you should know. First, you’ll have to pay premiums for between five and 15 years before the amount of money you’ve “saved” equals the amount of money you’ve paid in. If you are in it for the long haul, this isn’t a problem. However, life insurance companies front-load the fees on these policies, so if you let the policy lapse by not paying the premiums or you have to cancel the policy because you can no longer afford the premiums, you will have lost money.

Whole life insurance only works for people who plan to keep paying premiums until they die. Before you choose this type of life insurance, make sure that you’ll be able to meet the financial commitment for the rest of your life.

For people who don’t have a large family fortune to protect from estate taxes, whole life insurance is a bad investment. Most policies offer a 2% to 5% return, and that’s only after you’ve paid the fees upfront.

Term life insurance is a more practical and sustainable choice than whole life insurance for most people.

Not sure how much term life insurance premiums will cost? You can find out in just ten minutes, right now.