What is a life insurance premium?

In a nutshell

A life insurance premium is the amount of money you pay regularly to keep your life insurance policy in force.

• Term life insurance is typically cheaper than whole life insurance.
• Premiums are paid monthly, quarterly, biannually or annually, depending on the policy.
• The cost of life insurance is determined by a number of factors, including policy type and the age and health of the applicant.

How do life insurance premiums work?

When you sign up for life insurance you will choose the amount of coverage, how long you want the policy to be in effect and who will receive the payment should you pass away.

The amount of coverage is called the "death benefit" and the recipient of the money is called the "beneficiary."

In return for this coverage, you will owe a payment, which is called a premium. This is often paid monthly, but can also be paid annually. Life insurance companies use the premiums they collect to pay out death benefits, cover administrative costs and make a profit.

While the premiums are up-to-date, the policy will stay in force and pay the death benefit to the beneficiary if you pass away during the term of the policy.

Type of coverage

Life insurance comes in two forms: term and whole life.

Term life

Term life insurance is quite straightforward. A term policy will cover the applicant for a preset amount for a specific period of time. If the applicant dies within the covered time period, the death benefit is paid to their beneficiary.

If the applicant does not die during the covered period, the policy will end without having paid out and premiums will no longer be due.

For example, a 25-year-old with a new baby may choose $500,000 worth of coverage for the next 20 years. Each month, they will pay their life insurance premium and if they pass away within the next 20 years, their beneficiary will receive $500,000. If not, the policy will end without payment.

Whole life

Whole life insurance covers you for your whole life and does not have a preset time period of coverage like term insurance does. Whole life also has two parts: the death benefit and the cash value.

These two factors make whole life insurance more expensive than term insurance. For one, it is guaranteed that the death benefit will be paid out at some time, and you are paying for more than just the death benefit — part of your premium will fund the policy's cash value portion.

Factors that affect your life insurance premium

Morbid as it may sound, life insurance is priced based on the likelihood that you will die during the policy term. Therefore, anything that statistically makes it more likely you will pass away will increase your life insurance premiums.

Age

Your age greatly affects how much you'll pay for life insurance. The older you are, the more you'll pay. This makes sense, as the older you are, the more likely you are to pass away and make a claim on your life insurance policy.

A healthy 20-year-old with a 20-year policy has a very slim chance of passing away and the life insurance having to pay out. The same can't be said for an 80-year-old looking for a 20-year policy.

Gender

Since women have a longer life expectancy than men, life insurance is typically cheaper for women.

Those who are transgender can get life insurance but the process may take longer to complete as additional paperwork and evaluation may be required. Being assigned female is beneficial when it comes to life insurance as the premiums are lower. However, when identifying your gender, the life insurance company will use one of three methods:

• Gender at birth.
• Current legal gender.
• Self-identified gender at the time of the application.

Health

Your health will play a major factor in your life insurance premiums. The healthier you are, the lower your premiums will be. You will be asked extensive medical questions on the application.

Most life insurance companies also require a medical evaluation to be completed during the application process. This exam is a basic physical and may include height and weight measurements, blood and urine samples, blood pressure measurements and possibly an EKG. This exam is paid for by the insurer and conducted by a certified paramedical professional.

Lifestyle

Believe it or not, your lifestyle can also affect your life insurance premiums. Those with dangerous hobbies will pay higher premiums than those without. Hobbies such as sky-diving, mountain climbing or backcountry skiing, while fun, can increase your premiums.

Besides your hobbies, your everyday habits can affect your premiums. Smoking is a factor that will increase life insurance rates.

Note that you should never lie on your insurance application in hopes of a better rate. This is fraud, and if it is discovered, your policy could be voided exactly when you need it most.

Occupation

Along the same lines as dangerous hobbies, dangerous jobs will also affect your premiums. Some jobs that life insurance companies consider high-risk are:

• Active military service members.
• Police officers.
• Roofers.
• Construction workers.
• Miners.
• Steelworkers.
• Pilots.
• Farmers or ranchers.

Also, if you drive a lot for your job, it may be considered a high-risk occupation, even if the job itself isn't dangerous, such as sales.

How to estimate your life insurance premiums

To estimate your life insurance premiums, get free quotes from several companies. While this isn't your final price, it will give you an idea of what your price will be.

There are also online life insurance premium calculators, which estimate your costs.

For both methods, the more complete and honest you are with the information, the more accurate your quote will be. You'll need this information when you buy life insurance, so there’s no harm in collecting it now.

The AP Buyline roundup

Life insurance premiums are the payments you make to maintain your life insurance. Your premiums are determined by factors such as your age, gender, health, lifestyle and occupation. The type of policy you get will also significantly impact your premiums; term life insurance is quite a bit cheaper than whole life insurance.

You can get an idea of how much life insurance will cost you by using online calculators or getting free quotes from life insurance companies.

Frequently asked questions (FAQs)

How long do you pay life insurance premiums?

How long you will pay life insurance premiums depends on the type of policy. For term life, you will only pay premiums while the policy is in effect.

However, you will pay for a whole life policy until you pass away. Some whole life policies can become "paid up," meaning the total cost of the policy has been paid, and no further payments are due. This occurs if you have elected to make additional payments over time, or if you reduce the coverage amount.

Is buying life insurance worth it?

If you have loved ones who are dependent on your income, you'll want to purchase life insurance to provide for them financially in case of your death.

Why is my life insurance premium so high?

If your life insurance premiums are high, it could be due to several factors. Age, health, gender, lifestyle and occupation can all affect your rates.

Which policies have the cheapest premiums?

Term policies have the cheapest premiums. Also, the shorter the term, the lower the premium will be.

Does whole life insurance cost more than term life?

Whole life insurance costs more than term insurance because you are paying for both the death benefit and the cash value.

What happens if you stop paying life insurance premiums?

For term policies, if you stop paying your premiums, your policy will be canceled.

It's a little more complicated for whole life policies. If you stop paying your premiums, you can "cash out" the policy and receive any accumulated cash value. You can also reduce your death benefit to a level that will cause the policy to be paid up based on the premiums you've paid to that point.

It's also possible that neither of these options are available for a whole life policy. In this case, you'd want to speak with your agent to discuss your options.