What is a Life Insurance Premium?

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If you feel like you’re learning a new language any time you shop for insurance, you’re not alone. 

Whether you’ve purchased a life insurance policy before or you’re just starting out, navigating insurance lingo is no easy feat. There are many important terms to learn, from beneficiaries to underwriting…where to start?

First and foremost, you’ll want to understand the term premium. In short, your premium is the amount of money you pay the insurance company for your policy. Understanding how premiums work and what you can afford is key when it comes to getting the amount of coverage you need without jeopardizing your budget.

If you feel you already have a solid grasp on how life insurance works, but want to avoid filling out multiple applications, quote comparison sites like Insurify allow you to answer a few questions online and compare several life insurance quotes all in one place. You’ll be able to compare insurance products and coverage amounts that fit your needs…and find a life insurance premium that works for you, at no cost or commitment.

So, What is a Life Insurance Premium?

As mentioned above, a life insurance premium is what you pay for coverage. Typically, people make monthly premium payments, but it is possible to pay annually or quarterly as well. Monthly premiums are most common, though, so don’t be surprised if your life insurance company doesn’t offer annual or quarterly payment options. What the insurance provider agrees to pay out to your beneficiaries in the case of your passing is called a death benefit. In general, the larger the death benefit, the more expensive the premium.

When purchasing life insurance, a key part of the process is designating your beneficiaries. Beneficiaries are typically family members, but can also be your friends or business partners. Because your beneficiaries are the people closest to you, it’s important to a) purchase a life insurance policy that provides sufficient coverage and b) always pay your premiums. If there’s any lapse in your premium payments, your loved ones won’t be covered and you will have to reapply for a new policy. Given that life insurance premiums factor in your age, being older means you would likely end up with a more expensive policy.

Types of Coverage

Everyone’s life insurance needs are unique, so there are a handful of different types of insurance to choose from. Younger parents with kids and a mortgage will have very different needs than a 60-year-old with a sizeable retirement account. As life circumstances evolve, you can change your life insurance policy to match. So, you can purchase a term life policy to start and then switch to a whole life insurance policy if and when the need arises. However, it’s wise to keep the same policy for as long as you can because life insurance rates are typically higher the older you get.

The various types of life insurance are:

  1. Term Life Insurance: This type of policy is best for young people who want basic coverage without expensive premiums. Term life insurance policies are cheaper due to their set term length and simplicity. A level term life policy means you’ll be paying a level premium throughout the entire term.
  2. Whole Life Insurance: If you have more money to spend on your premiums and want a savings component with your policy, whole life insurance is permanent and accrues a cash value over a period of time: the rest of your life.
  3. Universal Life Insurance: Like term life insurance, universal life insurance policies tend to be cheaper. However, it’s important to note that universal life insurance is a permanent life insurance coverage with an investment savings component.
  4. Variable Life Insurance: These policies are more expensive because they provide lifelong coverage and a cash value account. Variable life insurance policies are riskier, though, because these policies don’t always have a guaranteed rate of return.
  5. Variable Universal Life Insurance: Again, this is a more expensive type of policy because of the lifelong coverage it provides and the fact that it also has a cash value component. This type of permanent policy is also flexible in how much the policyholder has to pay in a given month.

How Are Life Insurance Premiums Calculated?

When an insurance company calculates your life insurance premium, what they are really doing is calculating your risk level. If you die before your term is up, the provider ends up having to pay out the death benefit (which is often a lot of money in the form of a lump sum) to your beneficiaries. So, if you are sick or older, you are a riskier customer because the chance that you might die while insured, and therefore the risk that they have to pay out the death benefit, is higher.

The purpose of life insurance applications and medical exams are to assess your health, and therefore risk, to the provider. The higher the risk you pose, the more expensive of a premium you will have to pay. Conversely, if you are a non-smoker in excellent health, you might be offered lower rates.

When applying for life insurance, be prepared to answer questions or undergo assessments regarding your health history, prescriptions, family medical history, blood pressure, and other lifestyle factors, such as tobacco use and exercise habits. If you currently smoke, quitting a number of years before you apply for life insurance will help you qualify for lower rates.

Other factors besides age and lifestyle definitely influence the cost, such as the current state of their insured population and the economy, but those are out of your control. So, to secure the best rates, apply while you are young, and do your best to stay healthy.

Do Life Insurance Premiums Increase with Age?

When you purchase a life policy, whether it be term insurance or whole insurance, you commit to paying a certain premium for a certain amount of time. In the case of a term policy, that could be a 20-year term or a 30-year term. With a whole life policy, that “term” is your life.

Some types of policies allow for some premium flexibility, but generally, premiums are fixed. Because of this, your existing premium will not go up as you age. However, if you apply for a new policy after one ends or lapsing on your existing one, you are likely to get hit with increased premiums, at least partially due to your more advanced age.

If you are young and considering buying a life insurance policy, you will be able to save money in the long run by purchasing one early in life. Doing so will allow you to get a low premium for the next 20-30 years (or whatever you need). If you wait, your age will lead to higher premiums.

Are Life Insurance Premiums Tax Deductible?

If you itemize your tax deductions every year, you might be wondering if you can deduct your life insurance premium. Unfortunately, this is not the case. Though you can deduct your mortgage interest and charitable giving, your life insurance premiums are not tax deductible.

On the upside, though, if you passed away, your beneficiaries do not have to pay taxes on the death benefit payout. Death benefits are known for being tax-free and coming without strings.

Now that you have a general understanding of how life insurance premiums work, you can get started comparing quotes online.

Insurify’s free life insurance quote comparison platform allows you to get quotes from multiple providers in minutes, so it’s an easy way to do some quick research. Even if you don’t plan on buying a policy immediately, you can save your information and return later or bring your findings to an insurance agent. But remember, if you’re currently young and healthy, now might be just the time to buy a policy and lock in a great rate.

Sabrina Perry is a writer with experience in data journalism and a passion for translating complex topics into insightful and engaging stories. She has a degree in neuroscience from University of California, Santa Barbara and can often be found reading books about behavioral economics, decision-making, and personal finance.