Life Insurance Premiums: What are they and how do they work?

Do you struggle to understand how life insurance premiums are calculated? Are you unsure of what factors influence the cost of your policy?

Many people find themselves in this same situation, so educating yourself about the fundamentals of life insurance premiums is important. 

In this guide, we’ll explain how life insurance works when it comes to premiums. We’ll explore the ins and outs of life insurance premiums, from what influences their cost to how understanding them can save you money. 

We’ll also provide valuable tips on ensuring you get the best coverage for your needs while avoiding paying too much. Continue reading to learn more about how to pay for insurance.

What is a life insurance premium?

A life insurance premium is money you pay periodically to keep your life insurance coverage in force, typically as part of a monthly or annual payment plan. 

This cost will vary depending on the type and amount of coverage you’ve chosen to purchase and the company you select. 

Life insurance premiums are an affordable way to help ensure that your loved ones are taken care of if something happens to you.

Read more: Single Premium Life Insurance

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How are life insurance premiums determined?

Your current health is considered when determining life insurance premiums. Individuals with higher risk levels may pay more due to their shorter life expectancy. 

Younger and healthier people usually receive better rates because they’re less likely to die while the policy is still in effect, resulting in insurers collecting fewer premiums before paying out the death benefit. 

Term policies are often more cost-effective than permanent policies, given that there’s a chance an individual may outlive the term, which then renders it void for the insurer. 

Some of the factors that can influence the cost of life insurance premiums include the following:

Type of Coverage

Term and permanent are two common types of life insurance.

Term life insurance covers you for a specific period, such as 5, 10, or 20 years. It typically offers more coverage for a smaller premium than other types of policies. Find out the best term life insurance companies. (For more information, read our “How To Pay For Your Term Life Insurance Policy“).

Permanent life insurance offers lifetime protection and includes an investment feature known as cash value. As a result, this policy will typically have higher premiums than term life. You can, however, lower the cost with riders that provide additional benefits.

Here are some of the different types of permanent life insurance policies that life insurance companies offer:

• Universal life insurance
• Whole life insurance
• Variable life insurance
• Indexed universal life insurance
• Guaranteed issue life insurance

Read more: Limited Pay Life Insurance 

Age, Gender, and Health

When applying for a life insurance policy, your application will go through a life insurance underwriting process. This is where your insurance company evaluates factors such as your health, lifestyle, and occupation to determine what type of risk you represent and how much you should pay for coverage.

As you age, your premiums will typically increase because it becomes more likely that insurers will need to pay out the death benefit.

Your gender can also affect the cost of your premiums. According to a Harvard University healthy study, women in the United States have an extended lifespan of approximately five more years than men. As a result, life insurers often charge lower rates for female policyholders.

Your overall health plays a major role in determining the cost of your premiums. Life insurers review medical records and will also consider any existing health conditions. 

Conditions such as heart disease, diabetes, and cancer will typically increase your premiums due to a higher risk of death.

Read more: How To Calculate Your Life Insurance Age

Lifestyle Habits

When you purchase life insurance, among other questions, the insurer may ask about your current lifestyle habits, such as if you smoke, drink alcohol, or participate in extreme hobbies. This can affect how much you pay for your premium. 

According to research studies conducted by industry professionals, smokers pay $87.71 per month for life insurance, four times more than healthy nonsmokers. 

Insurers charge those activities at higher rates due to the greater associated risk of death for those individuals. However, if your lifestyle habits are more health-conscious and low-risk, it can help lower your overall cost of purchasing a policy.

Riders

Life insurance riders are optional features you can add to your policy for a fee. These riders provide additional benefits though they may not necessarily lower your premiums. Some common types of riders include:

• Term conversion rider
• Long-term care rider
• Disability income rider
• Terminal illness rider 
• Child benefit endorsement
• Waiver of premium rider

How do insurance companies use life insurance premiums?

Here are the three main ways insurers use life insurance premiums:

Covering Liabilities

Life insurers use the money you pay in premiums to pay for any claims or costs that may come up with your policy. This includes covering the cost of insurance benefits and any additional riders or services you add to your policy.

Investing Premiums For Profit 

Insurance companies will invest a portion of your premium payments to generate profits. These investments are typically conservative, such as bonds or mutual funds, which provide steady returns over time. 

This allows the insurer to cover claims from customers who have purchased life insurance policies. 

Read more: How do life insurance companies make money?

Covering Operating Costs  

Insurance companies have to pay for salaries, office space, and other overhead costs to stay in business. These recurring expenses are typically paid for by policyholders in the form of premiums. 

Paying Life Insurance Premiums

Life insurance premiums are typically paid annually, semi-annually, quarterly, or monthly. Each payment option will provide different cost-savings incentives, so consider your budget and the type of policy when deciding how to pay for life insurance coverage.

Paying annually, for example, is often less expensive than making life insurance monthly payments. You may also be able to take advantage of other discounts or incentives, including loyalty rewards, multi-line discounts, or early-payment discounts when you pay life insurance annually.

How to Pay Insurance Premiums

Depending on your chosen company, your first premium may be payable through several insurance payment methods. You can pay with a credit card, EFT, personal check, or cashier’s check.

Can you pay for life insurance on credit cards? It is worth noting that many insurers do not accept life insurance credit card payments after the first premium payment due to state regulations and high fees.

Check with your life insurer for information on accepted payment of insurance premium methods. 

Should you pay life insurance premiums monthly or annually?

As mentioned earlier, paying premiums can be done annually, semi-annually, quarterly, or monthly.

For many policyholders, annual payments may be the most affordable option because life insurers often offer incentives, such as discounts. It’s also more convenient because you will only have to make one payment each year.

On the other hand, if annual payments are not feasible, then the monthly payment option may be more suitable. You’ll be able to budget and spread out the payments over a longer period.

No matter which payment method you choose, ensure that your payments are on-time to avoid any penalties.

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Are life insurance premiums negotiable?

The short answer is no. You cannot negotiate your life insurance premium. Life insurance rates are determined by the information you provide during the application process, such as your age, health, gender, and lifestyle.

However, that doesn’t mean that you are stuck paying an exorbitant amount each month. There are still ways to save money when buying life insurance.

• Shop around.  Life insurance premiums can vary significantly between companies, so shopping around and comparing quotes is the best way to find cheap life insurance companies. 
• Look into discounts. Many life insurance companies offer discounts for things like being a nonsmoker, having a healthy lifestyle, or having certain occupations.

What happens if I miss a payment?

If you stop paying, the life insurance company will not pay your life insurance beneficiaries a death benefit if you die. This lapse in coverage is usually due to one of three scenarios: 

• Nonpayment: If you fail to make payments on your policy, the life insurance company will likely cancel your policy, and no death benefit will be paid out. (Read our “What happens if I don’t pay my life insurance premium?” for more information)
• Payments becoming unaffordable as your budget tightens: Because term life is cheaper, you may want to switch from a permanent life policy to a term life policy. (For more information, read our “How To Find a Lower Term Life Insurance Premium“).
• Forgetting to update your personal information: You must update the life insurance company when you make any changes to your personal information.

Reinstatement Options 

If your policy has been canceled because of missed payments, you may still have options on how to reinstate a lapsed insurance policy. Most companies will offer a reinstatement period for policies that have lapsed, but this period may only last for a limited time, usually 30 to 90 days. 

During this window, you can pay back-owed premiums and late fees without losing any coverage. 

After this period has passed, however, reinstatement may not be possible. In these cases, some insurers may allow reinstatement upon certain conditions, such as proof of insurability or a medical exam. 

Read more: How to Sell Your Life Insurance Policy

What happens if I make annual payments and die at the beginning of the term year?

You made your annual premium payment in February but died in May. What happens? Most states in the U.S. require that the insurance carrier refunds the unearned life insurance premiums. 

For instance, if you paid $600 in February for a year’s worth of coverage and died in the same year in May, your beneficiaries should receive the $600 back from the life insurance company.

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What if I need to change my payment schedule?

To change your payment schedule, contact your life insurance company directly. The company may be willing to work with you and change the payment schedule if needed. Your life insurer may also offer other payment options, such as automatic deductions from a bank account or savings plan.

It is best to look into all available payment options and make sure that you select the one best suited for your financial situation.

Case Studies: How Life Insurance Premiums Work

Case Study 1: Premiums Based on Health and Lifestyle

John, a 35-year-old non-smoker with a healthy lifestyle, decided to purchase a term life insurance policy. Due to his excellent health and low-risk lifestyle, he was able to secure a policy with a relatively low premium.

John understood the importance of maintaining his health and lifestyle to keep his premiums affordable, and he took proactive steps to stay healthy. This case study highlights how individuals with favorable health and lifestyle factors can benefit from lower life insurance premiums.

Case Study 2: Premiums and Age

Susan, a 50-year-old individual, wanted to secure a life insurance policy to protect her family. However, she found that her premiums were higher compared to younger individuals. Susan understood that age is a significant factor influencing premiums and decided to explore different policy options.

She discovered that a term life insurance policy with a shorter duration could provide her with adequate coverage at a more affordable premium. This case study demonstrates how adjusting the policy type and duration can help individuals manage their life insurance premiums based on their age.

Case Study 3: Riders and Premium Customization

Mark, a 45-year-old individual, wanted to enhance his life insurance coverage with additional benefits. He added critical illness and disability income riders to his policy to provide extra protection for himself and his family.

Although these riders increased his premiums, Mark recognized the value they offered in safeguarding against unexpected events. This case study illustrates how riders can be used to customize life insurance coverage and highlights the impact they can have on premium costs.

Life Insurance Premiums: Final Thoughts

A life insurance premium is the amount you regularly pay to keep your coverage active. Your insurer will use those premiums to cover any death claims that come in during your policy term. 

The younger and healthier you are, the lower your premium will be because you pose less risk to insure. However, other factors also affect your rates, such as the type of coverage and riders.

Carefully review your life insurance policy and ensure you understand the terms and conditions before signing. 

Shopping around for the best rate can be beneficial, and comparing quotes from different companies will help you to find the best deal for your needs.

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