Key takeaways

• • Insurers calculate insurance premiums, or the amount you pay for coverage based on the type of policy, your health and lifestyle, and riders included.
  • For whole life insurance, you pay fixed premiums for your entire lifetime, as long as you make your payments.
  • For term life insurance, premiums stay the same for the duration of the guaranteed level premium years selected.
  • Most companies offer options to pay premiums annually, monthly, or quarterly.

Thinking about purchasing life insurance? It’s the best thing you can do for your family and dependents — at least financially. However, before you buy life insurance, it’s important to understand basic terms like life insurance premiums, including how they work, the various types that exist, and how they affect the overall coverage. Premiums play a big part in life insurance cost and how much coverage your dependents get, so having a proper understanding of this term is essential.

Life insurance premiums are the payments you make (either monthly or annually) for the entire period of your policy’s life to keep it active. Your life insurance premium is part of your contract with your insurance carrier. Your premium payments are your obligation, while the carrier’s obligation is to pay out the death benefit if you die while the policy is in force.

Key Factors Influencing Life Insurance Premium Rates

The premiums you pay will vary based on several factors, including:

Policy Type

The policy type you purchase is the biggest determinant of how much your premiums will cost. Generally, term life insurance is cheaper than whole life insurance, a type of permanent life insurance. If you’re purchasing permanent life insurance with a fixed rate for your entire life, the policy premiums can be higher. Permanent policies tend to cost more because they accumulate a cash value against which you can withdraw funds and take loans while still covering your beneficiaries should you pass on.

On the other hand, if you opt for term life insurance, your rates may be lower if you’re expected to outlive the length of the policy term. Additional riders on your policy, such as a payout in case of accidental death or disability, can also increase your premium.

Age

Your life expectancy is another factor that life insurance companies use to determine your premiums. Look at it this way: younger people present a lower risk to insurers because they have a longer life expectancy and generally have good health.

As for older individuals, the risk is higher because they may have a lot of health complications that can lead to death. Therefore, younger people will often pay lower premiums than older people.

Sex

Men and women don’t pay the same premiums for life insurance coverage. Statistics indicate that women in the U.S. live longer than men by up to six years. Some life insurance companies may also factor this into their calculations for premium payments. Based on these figures, women may end up paying lower premiums than men for insurance.

Health

If you have health issues, multiple risk factors (such as smoking, heart disease, high blood pressure, or stroke risk), or you have a chronic illness, your life insurance premium may be higher since there is a higher chance of death occurring at a younger age than average. However, if you are young, don’t smoke, and have relatively good health, your premiums may be lower because you have a longer life expectancy.

By the way, some insurers require you to fill out a medical history questionnaire or carry out a medical exam before allowing you to buy life insurance to determine your overall health and if you have pre-existing conditions.

Lifestyle

If you have a lot of speeding tickets, love to paraglide, or engage in dangerous hobbies that insurers consider risky, your premiums may be higher since these kinds of activities increase the risk of premature death.

However, if your driving record indicates that you are a sensible driver and your hobbies are tame, your premium may be lower. Examples of activities that can increase your life insurance cost include scuba diving, rock climbing, smoking status, and bungee jumping.

Occupation

Your work can also affect your premium costs. For instance, if you work in construction or deal with hazardous chemicals, you present a generally higher risk than someone who works an office job. As a result, you may end up paying more for life insurance coverage.

Riders

If you add special options called riders to your insurance policy, your premium may increase slightly for each rider. Riders can cover additional payouts for things like accidental death or disability or allow for a waiver of premiums in case you become disabled and unable to work or pay your premiums.

Factors Your Life Insurance Company Won’t Consider

There are several factors insurers don’t consider when calculating or determining your life insurance premiums. These include marital status, sexual orientation, ethnicity, race, religion, number of life insurance policies, and number of beneficiaries.

How are Life Insurance Premiums Calculated?

Life insurance companies calculate and determine your premiums in a process referred to as underwriting. This process involves the assessment of your risk factors through several steps, including:

• Application Review: The life insurance company collects your personal information, like age, gender, medical history, and lifestyle habits.
• Medical Examination: Your insurer may require you to undergo a health exam to determine your health status. Alternatively, the insurer may just require you to fill in a questionnaire. In such cases where no examinations occur, the policies tend to have higher premiums.
• Financial Review: Your insurer then evaluates financial information to determine your ability to meet your financial obligations, including paying insurance premiums.
• Risk Classification: Based on the gathered data, the insurance company places you into different premium rate classes. These represent the level of risk you represent.
• Policy Approval: The last step in the underwriting process is either approval or denial of your application based on your overall risk.

Premium Rate Classes

Life insurance premium rate classes are categories that insurers place applicants for insurance to determine the premium amounts to charge for a policy. For life insurance, these classes reflect the life expectancy of the applicant based on the data they collect about the individual. There exist several rate classes, including:

Preferred Plus/Super Preferred

This premium rate class falls in the lowest risk category. As such, if you fall into this category, you will pay the lowest premiums possible.

To qualify for this premium class, there are several qualifications you must meet, including:

• You must have excellent health with no history of chronic diseases in your family, such as cancer, cardiovascular diseases, diabetes, etc.
• You don’t engage in risky hobbies.
• You have a safe occupation.
• You don’t have a history of drug and alcohol abuse in the last 10 years.
• You don’t smoke or haven’t used tobacco in the last five years.

Preferred

The preferred premium rate class is almost similar to the preferred plus. The only distinguishing factor is that while both classes require that you have excellent health, the preferred class gives some leeway if you have an existing health issue that’s under control.

That is to say, your profile may indicate some risk (health-wise), but since the condition is well-managed, it does not significantly affect your life expectancy. For instance, if you have controlled diabetes or hypertension, insurers may not consider you high-risk, and you could qualify for this premium class.

Standard

The standard premium rate class indicates typical or manageable risk and that’s why most people fall in this category. To qualify, insurers don’t require you to have excellent health. You could be on multiple medications and have potential issues and still be in this group. In fact, most individuals in this class typically have a slightly higher than normal body mass index (BMI).

This premium rate class is also lenient on tobacco use because insurers require you to be tobacco-free for only a year before applying for life insurance. The standard premium class also doesn’t discriminate against having an imperfect driving record or a risky occupation like aviation.

Substandard

This premium class carries a higher risk than the standard one. An insurance company can group you into this class if you have significant health issues, a risky past, or a short period of managing a condition. Examples of conditions that can place you in this class include past drug abuse, Type 1 diabetes, bipolar disorder, and severe asthma.

For this class, insurance companies use a table rating system to classify your risk level against the standard class. Usually, insurance companies charge an additional cost of 25 percent on top of the standard price based on each of your risk factors.¹

It’s worth noting that the risk class you fall in now isn’t set in stone. There are several steps you can take to improve your risk score so you can pay less in premium payments. For instance, if you make changes in your lifestyle like eating healthy foods and working out to lose weight, you can move from the standard premium rate class to the preferred class.

The same applies if you have a risky occupation — if you move to a safer job, you can move up the classification. Additionally, if you’re a smoker, quitting can also work in your favor, although you have to wait for a year to pass to improve your premium rate.

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Types of Premium Structures

The premium structure you choose will determine how much you pay for the entire term of the policy. It will also determine the total cost of your life insurance policy, so it’s in your best interest to understand how each works and get it right from the start. Let’s explore some various types of premium structures:

Level Premiums

As the name suggests, with a level premium structure, the payments remain consistent throughout the policy’s lifetime until you (the insured) reach a predetermined age, usually after you turn 65. As such, level premiums end up transitioning into stepped premiums.

Stepped/ Increasing Premiums

“As you age, so does your risk increase,” is the theory behind this policy structure. The premiums you pay under this structure increase as you get older because the likelihood of claims also increases.

In the short to medium term, this structure might seem like the cheapest option. However, as you age, life insurance becomes more expensive because you pay more.

Hybrid Premiums

This structure combines level and stepped premium structures. In that case, you pay stepped premiums for a certain period, then level premiums for the remaining time of the coverage. This structure helps you align your short and long-term needs, all in a single life policy.

Single Premium Life Insurance

Single premium life insurance or SPL insurance is a type of premium structure where you pay a one-time lump-sum amount in exchange for coverage for your dependents. A portion of your premium also goes towards a cash value that lets you borrow against it or withdraw funds from it.

You can purchase single premium life insurance policies in three different forms: whole life insurance, universal life insurance, and variable life insurance.

Payment Options for Insurance Premiums

On top of the structures, you can also choose the payment frequency and method for your premiums. Frequency refers to the number of times you pay your insurance premiums, while the payment method is how you choose to make your payments.

Insurers usually offer four main payment frequency options:

• Annual: This option requires you to pay a lump sum amount towards your premiums each year. Depending on the insurance company, this option can be the best (and cheapest) because insurance companies usually offer a discount when you pay annually.
• Semi-Annual: You pay premium costs two times a year, usually every six months.
• Quarterly: The payments for this option are usually spread out four times a year, which is every three months.
• Monthly: Usually the most preferred and common option, especially for salaried individuals, this alternative requires you to make payments each month.

As for the payment methods, you can pay premiums through mail, credit/debit card payments, payroll deductions, etc. You’ll have to check with your insurer the methods they accept since they vary from one company to another.

What Happens If I Miss Life Insurance Premium Payments?

If you miss a payment(s), there is usually a short grace period (usually 30 days) during which the life policy stays in force, assuming you make the payment within that time period. If you don’t pay your premium during the grace period, your life policy will lapse, which results in losing coverage for your beneficiaries.

Nonetheless, you can apply to have the lapsed life insurance plan reinstated — reactivating your policy. Just like the grace periods for premium payments, reinstatement also has a time frame, which is, on average, three to five years.

The reinstatement process may involve retaking a medical exam or answering health questions to prove that your risk profile is the same, especially if it’s been more than a couple of years since your plan lapsed. Unfortunately, if you die before you reinstate your life insurance policy, your beneficiaries don’t get any death benefit.

Are Premium Payments Flexible?

Some can be. Premium flexibility refers to the ability to adjust your life insurance premium payments in frequency and amount, with limits. This feature is essential for keeping life insurance policies active, even during financial hardships.

You can adjust your payments up or down, depending on your financial situation. For instance, if your income increases due to a change in jobs, you can increase your payment amounts.

It’s worth noting that payment flexibility for life insurance is only possible for permanent life insurance policies, more specifically, universal life insurance. If you have a whole life insurance policy, you pay a fixed premium rate for your lifetime. Universal life insurance policies also allow you to adjust the cash value and death benefit amounts.

Term life policies typically do not allow premium flexibility. So, if you fail to pay on time and miss the grace period, the term life insurance policy may lapse, and you’ll lose coverage. When a term life policy ends, insurers usually recalculate your risks, which may increase your premiums. A new policy may, therefore, have a higher rate (as risks generally increase over time due to aging and health considerations) than reinstating an existing life insurance.

So, How Much Does Life Insurance Cost?

To determine the cost of life insurance and consequently get the best life insurance, there are several methods you can leverage, including:

Checking Average Life Insurance Rates

There isn’t a one-fits-all answer for average life insurance rates due to complexities added by varying factors. Let’s look at rates for different insurance types to give you some perspective.²

Term Life Insurance Rates

For nonsmokers, the average annual term life coverage rates vary between $177 and $9,436 for women and men in the age range of 20 to 70. The average rate for smokers within the same age range was between $557 and $32,708. (These rates are for a term life insurance worth $500,000 for a term length of 20 years.)

Based on term length, term life insurance premiums vary as follows for nonsmokers:

• 10 years: $180 for women, $207 for men
• 20 years: $282 for women, $334 for men
• 30 years: $460 for women, $579 for men

Whole Life Insurance Rates

The average annual cost of whole life insurance policies for nonsmokers aged between 20 and 70 is $2,633 to $28,702 for women and men. Smokers average between $3,075 and $38,308.

If you want to better estimate how much it will cost to purchase a life policy, you can ask an insurance company for a life insurance quote. Some provide quotes absolutely free of charge. Quotes can especially be helpful for comparing policies between different insurers.

Alternatively, you can use an online life insurance calculator to determine how much life insurance you need to cover your loved ones.

Are There Additional Costs Beyond Insurance Premiums?

Yes, on top of the premiums, there are costs you should consider because they affect overall life insurance rates. Even the cheapest life insurance companies may end up being expensive if you factor in hidden charges and fees.

Administrative fees are the most common type of additional cost charged on your life insurance policy. Also known as policy fees, these amounts cover the insurer’s costs for managing your policy and are typically charged monthly or annually.

Surrender charges are another cost you should check for when purchasing life insurance. These are fees charged if you decide to surrender or cancel your policy prematurely. Surrender charges are often high in the early years of the policy and gradually decrease over time.

Tax Implications of Premiums

Policy premiums are generally not tax-deductible for individuals because the IRS considers life insurance a personal expense, much like buying a car or paying rent.

In certain contexts, though, premiums may be tax deductible, especially for businesses. For instance, an employer can deduct the cost of providing group term life insurance for employees up to a death benefit of $50,000.

Additionally, if a business purchases life insurance for key employees under a key person insurance plan, the premiums are generally not tax-deductible.

How Do Life Insurance Companies Make Money?

Your life insurance company receives the premiums paid for policies. This is the company’s cash received. The company also pays out money for death benefits, surrender benefits, taxes, and expenses. This is the company’s cash expenses.

The company invests the excess of the cash received minus the cash expenses. The excess of the cash received plus the investments, minus the cash expenses, is the insurance company’s profit.

Conclusion

Premiums are the biggest determinant of how much your life insurance will cost. Therefore, you must take time to understand how they work so you can make the best insurance decisions.

At Fidelity Life, we can help you find a life insurance policy that’s best suited for your needs. Whether you need a permanent policy, term life insurance, or final expense insurance, we’ve got the solution for you!

Get a free quote today or speak to an agent directly for any questions you might have regarding our offers.

At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible. We encourage you to speak with your insurance representative if you have additional questions and make sure you read your policy contract to fully understand your coverage.