What is a life insurance premium and how does it work?

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If you have life insurance or are considering buying it, you probably have some questions. Which policy type is right for you? How much will that policy cost? What is a life insurance premium and how will my premium be determined?

Ultimately, understanding your life insurance premium ensures you can do two key things: afford your policy and keep it in effect. So let’s give you an easy life insurance premium definition.

What is a life insurance premium?

At its simplest, your life insurance premium is the amount you pay to your insurance provider for your life insurance policy. It’s the same as your car insurance premium or your homeowners insurance premium. Your life insurance premium is the cost of your coverage.

Together with your life insurance provider you’ll come up with a plan for when your life insurance premiums are due. You might owe them money every month or each quarter, or you might need to pay your life insurance premium in full once a year.

You need to know your premium because if you can’t pay it, your policy will lapse. That means that if you pass away, your beneficiaries won’t get any of the death benefit. And even if you do realize you missed a premium payment and move to pay it right away, it might be too late – even just one missed payment is grounds for your provider to cancel your coverage.

How are life insurance premiums used?

Now that you know what a life insurance premium is, you might be wondering where that money goes once you hand it over to your insurer. Generally, insurance providers can do three things with your life insurance premium:

  • Use it to cover their liabilities. Insurance providers have to be ready to pay out on claims. For a life insurance company, that means that if one of their insureds passes away, they need to pay out the death benefit — plus any other policy perks — to the policyholder’s beneficiaries. They keep some of their life insurance premiums payment money on hand to make good on the agreements they have with their insureds.
  • Use it for business expenses. Like any other company, an insurance organization costs money to run. Your insurance provider can use your life insurance premium to pay for salaries, office space and more.
  • Invest it. Some insurance providers invest a portion of the money they receive. Good returns on those investments allow them to keep the cost of their insurance products as low as possible. But don’t worry – insurers are subject to liquidity ratio requirements that ensure they have sufficient liquid assets on hand to cover claims as they need to be paid out.

How are life insurance premiums determined?

Premiums on life insurance policies vary from person to person. Why? Before they issue you a life insurance policy, insurance providers evaluate you to determine how risky you are to insure. In life insurance, a higher risk level means you’re more likely to pass away soon and that means that your insurer is more likely to have to pay out your death benefit. So younger, healthier people generally see lower premiums on life insurance policies.

Here are some of the main factors an insurance company considers when determining your life insurance premium:

Type of coverage

You can choose between two main types of life insurance: term and permanent policies.

Term policies cost less, but they expire after a certain period (the term). Permanent policies stay in force for the duration of your lifetime, but you get a higher life insurance premium for that longevity.

Age

The earlier you buy life insurance, the less you’ll pay for it. To get a feel for how much lower your life insurance premium could be if you buy a policy now, check out our breakdown of policy cost by age. The takeaway? A healthy 50-year-old will pay three times as much (or more) for a policy as a healthy 25-year-old.

Sex

Since women tend to live longer, they are less likely to die while the policy is in force which means the insurer is less likely to have to pay out the benefit. As such, women usually get cheaper premiums on life insurance.

Health

Most life insurance policies require a medical exam. This is your insurance provider’s way of making sure a preexisting condition won’t drastically shorten your life.

The healthier you are, the less you’ll pay for your life insurance premium. And you can control your health, at least to an extent. So if you want lower premiums on life insurance, maintain a healthy diet, exercise regularly and definitely quit or avoid smoking.

Lifestyle

The way you live impacts your risk level in the eyes of insurers. Motorcycle ownership or a penchant for skydiving – or other risky and dangerous behaviors – will land you a higher life insurance premium.

Riders

Just like other insurance policies, you can add riders — also called endorsements — to your life insurance policy to expand your policy benefits. You can add a rider to cover the cost of your long-term care later in life, for example.

Riders give you add perks with your policy, but they also make your coverage cost more.

Frequently asked questions

What is the best life insurance company?

That depends entirely on you, your budget and the type of benefits you want to leave behind for your loved ones. To find the best life insurance company for you, compare quotes from leading coverage providers. That way, you can rest easy knowing you’re getting the best policy for the lowest life insurance premium possible.