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Life Insurance Premiums 101: How They Work & Factors That Impact Costs

What Is a Life Insurance Premium?

A life insurance premium is the amount you pay to keep your life insurance coverage active. However, while all life insurance policies require this payment to continue coverage, many of the other features vary widely depending on your age, medical history, hobbies, and other factors. Even the cadence at which you can pay this fee is highly variable.

Learn more about the factors that determine life insurance costs and how much you may pay.

What Does a Premium Pay For?

At a minimum, paying a life insurance premium to an insurer continues your coverage, allowing the policy beneficiaries to receive a death benefit payout should you pass away. However, outside of the death benefit, the features that it covers, and the cost, differ by what kind of policy you have.

For example, permanent life insurance policies often include a “cash value” savings component. Because of this extra feature, the cost for permanent policies tend to be higher than those that do not include cash value.

To understand why these can differ, explore the differences between the types of coverage. The most common types of life insurance policies include:

  • Term insurance: Term Life provides coverage for a set period of time, usually between 10 and 30 years. When the term is over, so is the coverage (including the death benefit), at which point one must purchase another policy in most cases. Term Insurance does not have a cash value component, making it cheaper than the alternatives.
  • Permanent insurance: Permanent life insurance is a type of life insurance coverage that provides lifelong protection as long as the premiums are paid. It combines a death benefit with a cash value component that accumulates over time and can be accessed by the policyholder during their lifetime. A permanent policy is generally more expensive than term but does offer significantly more features.

How Do Life Insurance Premiums Work?

In most cases, insurers mandate these fees to ensure the continuation of coverage from period to period. All of the other factors that dictate their cost will depend on the type of policy one selects, that individual’s health, and their location, occupation, and other factors.

How Are Premiums Calculated?

Each life insurance policy’s cost is as unique as the person who ordered the quote. While these factors vary, they are usually dictated by the following:

  • Age of the insured person
  • Gender of the insured person
  • Health status, including medical history and current health conditions
  • Lifestyle choices, such as smoking or engaging in high-risk activities
  • Family medical history
  • Occupation or profession
  • Desired coverage amount
  • Type of policy (term or permanent)
  • Length of the policy term

Ultimately, insurance costs are determined by the insurer’s perception of risk, in this case, pertaining to the policyholder’s death. Therefore, those considered less at risk of dying, and therefore not cashing out their death benefit, will pay less for coverage than someone seen as higher risk.

Insurers often mandate that policy applicants be subject to medical underwriting. Medical underwriting is a process by which a doctor, on behalf of the insurer, will perform a thorough medical exam to determine the health of the applicant. This information, in conjunction with the other factors above, determines an estimate for the premium, also known as a quote.

What Is the Cadence of Premiums Payments in Life Insurance?

The cadence of life insurance premiums, or the frequency of payments, is typically determined by the insurance company and the policyholder’s preference. Here are the common options for premium payment frequency:

  • Annual: Premiums are paid once a year, usually on the anniversary of the policy or within a specified timeframe.
  • Semi-Annual: Premiums are paid twice a year, typically every six months.
  • Quarterly: Premiums are paid four times a year, approximately every three months.
  • Monthly: Premiums are paid on a monthly basis, spreading the cost over 12 installments within a year.

The specific payment options available may vary among insurance companies and policies. Some insurance companies may offer additional flexibility, allowing policyholders to choose a customized payment frequency, such as bi-monthly or bi-weekly.

It’s important to note that insurance companies may have different guidelines regarding the available premium payment frequencies, and the chosen frequency may impact the total annual cost.

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 annually, any changes to frequency might not go into effect until after the year is up.

Are There Different Kinds of Premiums?

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
  • Annual renewable term: premium increases from year to year
  • Single premiums: one large premium payment fully funds the policy immediately

Level Premiums

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

Having a level cost for permanent insurance generally means that your rate is locked in for life.

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.

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

Single Premiums

A “single premium” life insurance premium refers to a payment option where the policyholder pays the entire amount upfront in a single lump sum. In other words, instead of making regular payments over time, the policyholder makes a one-time payment for the entire coverage period.

The cost of this type of insurance policy can vary significantly depending on factors such as the insured person’s age, health, desired coverage amount, and the type of policy chosen.

What Happens If You Miss a Payment?

Generally, if you neglect your premium payments, you will eventually lose your coverage. But, missing a single payment does not mean your insurance company will cancel your plan immediately. Most companies have a grace period of around 30 days. Permanent life insurance policyholders may even use their policy’s cash value to pay coverage fees.

However, if your policy lapses, you may be allowed 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 policy fees if you become seriously ill or disabled and cannot work. However, note that this may not be available as an option on all life insurance policies.

Premiums and Tax Deductions

In general, life insurance policy fees 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 fees 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 policy cost. 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 coverage cost goes toward a savings fund. Insurers guarantee your cash value will grow at a certain rate. They also commit to paying a death benefit. Conversely, term insurance is less likely to be paid out and doesn’t have a cash value component.

You can find different rates within permanent life insurance, 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. Other types of policies may have other expenses rolled into the polocy cost. For example, if you choose variable life insurance, you may be liable for management fees on your investment.

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 policy cost is specific to their situation, but you can reduce your payments in a few ways.

1. Shop Around For a Different Policy

Don’t feel obligated to take the first option. Insurance companies offer a range of policy costs 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 coverage, you must talk to an agent to assess your needs, budget, and types of policies. They will provide a personalized quote but remember that number may change during the underwriting process

2. Choose Term Insurance

Term insurance provides more cost-effective coverage for many policyholders. The reason is that because term life policies expire, insurers are less likely to pay out the death benefit. With less liability, insurance companies charge significantly lower fees.

Many 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 their 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 ensure 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 insurance payment might be less expensive than starting a new policy when you are older and may be in poorer health.

3. Improve Your Health

Insurance companies take your lifestyle and health history into account. While you can’t control all these factors, implementing healthier habits can help you lower your policy’s cost. 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 policy costs if you apply for life insurance later. 

4. Reduce Risky Activities

Hobbies like skydiving, horseback riding, and off-roading may make your life more exciting, but to an 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 policy cost or be excluded from your policy’s coverage. 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 initially, but it’s essential to understand the policies and factors affecting your premium. With that information, you can take preventative action to reduce your policy’s cost while still providing for your beneficiaries. 

Remember that costs are highly personal, so yours will vary from the 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