Global Privacy Signal Detected
Skip to main content

Top Factors Affecting Life Insurance Premiums

What Is a Life Insurance Premium?

A life insurance premium is how much you pay for your insurance coverage. All types of insurance require a premium. When it comes to life insurance, this cost varies widely, depending on your age, medical history, hobbies, and other factors. 

Policyholders must make premium payments on time to keep their coverage active. Often, insurers provide options to pay monthly, quarterly, semi-annually, or annually. 

If you miss a payment, your coverage may lapse. In some cases, your insurer might allow you to reinstate the plan by repaying missed premiums. Otherwise, your plan could be canceled.

What Does a Premium Pay For?

As a policyholder, paying a premium means that your beneficiaries will receive a payout—known as a “death benefit”—in case of your death. But the payout they receive would be higher than the total of your premium payments. 

That’s because insurers pool all of their policyholders’ premiums to cover their expenses. Essentially, premiums act as income for insurance companies. Rather than keeping these payments in cash, many companies invest a percentage in low-risk commodities. They then use the interest and dividends to pay death benefits and fund regular business expenses, like offices and salaries. Any remaining income becomes profit.

Premium payments work differently depending on which type of life insurance policy you have. Permanent life insurance policies include a “cash value” savings component. It costs less to insure younger adults, but if your premium raises every year, it might become unsustainable. Instead, insurers distribute the cost throughout your lifetime. 

A percentage of the higher premium goes toward the death benefit, but another part goes to the cash value fund, which grows from investments. In certain circumstances, you can access this money to fund retirement or help pay premiums later on.

When it comes to life insurance, you have quite a few options. The most common types of life insurance include:

  • Term insurance: provides coverage for a set period of time, usually between 10 and 30 years
  • Whole life: permanent life insurance with a fixed, guaranteed cash value and death benefit
  • Universal life: permanent life insurance with flexible cash value and death benefit; adjustable premiums
  • Variable life: permanent life insurance with options for riskier investments and varied outcomes

How Do Life Insurance Premiums Work?

Insurance companies calculate premium rates based on your demographic information, medical history, and lifestyle. Read on to learn more about the process. 

Which Insurance Policies Charge a Premium?

All insurance coverage requires a premium. In addition to the life insurance policies listed above, these types of policies also charge premiums:

How Are Premiums Calculated?

When applying for insurance, you’ll receive a quote based on the age, gender and medical history you provide. Then, insurance companies go through an underwriting process to determine any further risk.

Insurers calculate life insurance premiums based on your:

  • Type of policy: Term life insurance costs less, since it’s less likely insurers will have to pay a death benefit.
  • Age: Premiums generally increase as you age.
  • Gender: Women have a longer life expectancy than men, and typically pay lower premiums.
  • Health and medical history: Factors like smoking, high blood pressure or family history of cancer can increase your premium. 
  • Lifestyle: Riskier hobbies, like skydiving, can be a cause of concern for insurers.

What Is the Cadence of Premiums Payments in Life Insurance?

Policyholders may pay life insurance premiums monthly, quarterly, semi-annually, or annually. If possible, set up autopay or an automatic transfer to make sure you don’t miss a payment. 

Depending on your situation, it may be easier to split up the payment each month instead of paying a large sum once per year. However, by paying annually, you may receive a discount or avoid extra processing fees. 

One exception is single-premium life insurance—just like it sounds, this type of policy only requires one large payment to be fully funded. 

Can You Change the Frequency of Payments?

Yes, you can usually change your premium frequency. Most insurance companies allow you to make this adjustment through your online account, but you can also contact their customer support to help.

If you pay your premium annually, any changes to frequency might not go into effect until after the year is up.

Are There Different Kinds of Premiums? (25 words)

Yes, you can choose different premiums for life insurance based on your needs and type of policy. Some common premiums include:

  • Level premiums: a fixed monthly payment for the duration of the policy
  • Stepped premiums: premium increases from year to year
  • Single premiums: one large premium payment fully funds the policy immediately

Level Premiums

With a level premium policy, the insurer guarantees that your payments will stay consistent. For term life insurance, the premium is valid for the duration of your policy. If you choose to renew for another term, your premium might increase. The death benefit remains fixed.

Having a level premium for permanent insurance generally means that your rate is locked in for life. However, your death benefit typically increases as the policy matures. 

Annual Renewable Term

With Annual Renewable Term (ART) premiums, your cost increases each year. The life insurance company evaluates your age and other factors on an annual basis to determine the new rate, but they should provide a lifetime estimate when you initially sign up.

This could be a good option if you expect to earn more—and have money for higher premiums—as you age. Be sure to speak with a financial advisor to make sure you won’t overextend your finances later in life. 

Single Premiums

With a single premium, the insurance company charges one large sum—usually at least $5,000—to fully fund your policy. In some cases, you can access the cash value while still alive through a loan or withdrawal. 

Some policyholders use this money to fund their retirement or emergency care. The insurance company may allow you to withdraw money if you’re diagnosed with a terminal illness.

What Happens If You Miss a Payment?

It’s crucial to choose a financially sustainable policy. But if you do miss one payment, your insurance company won’t cancel your plan immediately. Most companies have a grace period of around 30 days. Permanent life insurance policyholders may use cash value to pay for premiums as well.

If your policy lapses, you might be able to reinstate it by repaying missed premiums with interest. If you’re facing financial hardship, work with your insurer to develop a payment plan as early as possible.

One way to avoid this situation is by adding a waiver of premium rider to your policy. With this rider, the insurer promises to cover your premium if you become seriously ill or disabled and are unable to work. You can add this to any life insurance policy, sometimes after the policy takes effect. 

Premiums and Tax Deductions

In general, life insurance premiums are not tax deductible. The IRS considers this a personal expense, just like any other purchase you make. 

Employers, however, may be able to write off their employees’ group life insurance premiums, up to $50,000. If you donate your payout to charity, you may also receive a tax benefit. 

How Does the Cost of Premiums Vary by Type of Insurance?

The type of policy, death benefit, and cash value all affect your premium. More extensive coverage equals more expensive premiums. Take a look at the below quotes for a $500,000 death benefit policy for a 30-year-old in excellent health:

Policy Type
Average Monthly Premium (Male)
Average Monthly Premium (Female)
Term, 20 year
Whole Life
Universal Life

With whole life insurance, part of your premium goes toward an investment fund. Insurers guarantee your cash value will grow at a certain rate. They also commit to paying a death benefit. Term insurance, on the other hand, is less likely to be paid out and doesn’t have a cash value component.

You can find different premium rates within a permanent policy, too. Universal life insurance, for example, tends to be less expensive than whole life. Without a fixed death benefit and cash value, you can find more flexibility and adjustable premiums. 

If you choose variable life insurance, you may be liable for management fees on your investment. Be sure to analyze all additional costs when choosing your policy. 

To get a personalized quote, most companies require you to speak with an insurance agent to discuss your situation and goals. 

How To Lower The Cost of Your Life Insurance Premium

It’s important to find a policy that fits your needs—and your budget. Each policyholder’s premium is specific to their situation, but there are a few ways you can reduce your payments.

1. Shop Around For a Different Policy

Don’t feel obligated to take the first option. Insurance companies offer a range of premiums for life insurance, so take the time to get a few quotes and compare your options.

For term insurance, you can complete a short online application to get an initial quote. For permanent insurance, you must talk to an agent to assess your needs, budget, and types of policies. They provide a personalized quote, but remember that number may change during the underwriting process. 

2. Choose Term Insurance

Term life insurance provides more cost-effective coverage for many policyholders. Most people outlive their term life insurance policy. If that is not the case, insurance companies only have to pay out a death benefit, not cash value. With less liability, insurance companies charge significantly lower premiums.

Many people choose term insurance to cover their families without leaving any debt behind. A parent might take out a 20-year policy to ensure their mortgage is paid and children can attend college. But circumstances change, and sometimes, you need longer coverage. If you take in an elderly parent, for example, you might want to adjust your policy to make sure they will be taken care of.

Insurers may allow you to convert your policy to permanent life insurance without completing a medical exam. This means your premium might be less expensive than starting a new policy at an older age.

3. Improve Your Health

Insurance companies take your lifestyle and health history into account. While you can’t control all of these factors, implementing healthier habits can help you lower your premium. Take action to reduce your chance of heart disease and high blood pressure, which can both increase your insurance costs. 

Insurers also flag nicotine use during the application process. Quitting smoking improves your overall health and can lower your premiums if you apply for life insurance later. 

4. Reduce Risky Activities

Skydiving, horseback riding, off-roading—these may make your life more exciting, but to a life insurance company, they’re “hazardous activities.” During the underwriting process, insurers flag any high-risk hobbies they discover. Some dangerous jobs fall into this category as well.

Risky activities could increase your premium or be excluded from your policy. Depending on the situation, insurance companies might disqualify you altogether. You will face penalties for omitting this information on your application, so the safest choice is to avoid high-risk hobbies in the first place.

Putting It All Together

You can customize life insurance to your needs, budget, and financial goals. It may feel overwhelming at first, but it’s important to understand the types of policies and factors affecting your premium. With that information, you can take preventative action to reduce your premium while still providing for your beneficiaries. 

Keep in mind that premiums are highly personal, so yours will vary from averages you find online. Talk to a few insurance agents to find the best fit for your budget. 

Plan for your family’s future. Get a life insurance quote today.

Get a quote

Plan for your family’s future. Get a life insurance quote today.

Get a quote