Many people think life insurance is very expensive, but life insurance premiums can be surprisingly affordable, depending on factors like your age, the type of policy you get and the amount of coverage you need. Life insurance rates are different for everyone, and the cost can vary significantly between individuals. If you are in the market for life insurance, understanding life insurance premiums, including how they work and how they are calculated, can be helpful. In this guide, we will walk you through some common questions about life insurance premiums, like what happens if you stop paying your premiums and what factors are used to determine your premium.

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What is a life insurance premium?

A life insurance premium is the amount of money paid to your life insurance company in exchange for your life insurance coverage. As long as your premiums are paid on time, your coverage will remain in place for the duration of your policy, which protects the financial security interests of you and your designated beneficiaries. Typically, life insurance premiums are paid monthly, quarterly or annually, depending on how you set up the policy with your insurer.

What if you stop paying life insurance premiums

If you stop paying your life insurance premiums, your policy could lapse depending on the specific terms outlined by your insurer. Your policy may come with a grace period — a certain amount of time in which your policy will not lapse for nonpayment. However, a standard term life insurance policy will typically lapse if you miss a payment. If your policy does lapse, your dependents would no longer receive a death benefit if you were to pass away, leaving them vulnerable to financial risk.

Missing a life insurance policy payment may be treated differently with permanent life insurance policies, which include cash value accounts. Money in the cash value account can typically be used to pay premiums after a stipulated amount of time, so if you forget to make a payment, your policy might not lapse if the cash value is utilized.

How are life insurance premiums used by insurers?

Now that you know what a life insurance premium is, you might be wondering how that money is used once you hand it over to your insurer. Generally, insurance providers may use your life insurance premium in the following ways:

  • To cover liabilities: Insurance providers have to set themselves in a financial position to pay out on claims. That means that if a policyholder passes away, the insurer will use a portion of total paid premiums to cover the set death benefit (and any other policy payouts) to the designated beneficiaries. Financially stable insurance companies will usually keep a set amount of premium money on hand to cover outstanding liabilities and ensure beneficiaries receive what is owed in the event of the policyholder’s untimely passing.
  • To cover business expenses: Like any other company, a life insurer has to account for operating costs. A portion of your life insurance premium may go towards salaries, office space, legal fees or other business expenses.
  • To invest: Some insurance providers choose to invest a portion of policyholders’ premiums in the growth of the insurance company and subsequent benefit to policyholders. Good returns on those investments may allow them to keep the cost of their insurance products as low as possible and can help provide greater financial stability and peace of mind to stakeholders (policyholders).

How are life insurance premiums determined?

The cost of a life insurance policy will vary for each person. Before a life insurance company issues you a policy, your health and other factors will typically be evaluated to determine how your life expectancy compares to your policy’s duration of coverage. With life insurance, a higher risk level means you’re more likely to pass away before your policy expires and therefore, your insurer would pay the death benefit before significant contributions have been made in the way of premiums. Because of this, younger and healthier individuals generally see lower premiums on life insurance policies. In addition, a term policy may be cheaper than a permanent policy, as you might outlive the term policy length and the insurer may not have to pay out a claim.

Certain policies, such as variable universal life policies, have flexible premiums. Policyholders may choose to pay a larger amount in premiums (to increase the policy’s cash value amount), pay only a portion of their premium or avoid paying their premium out of pocket altogether. The policyholder must have enough money built up in their cash value account to not pay their premium out of pocket or only pay a portion of it. When you don’t pay the full premium balance out of pocket, the remaining amount of money would be subtracted from your policy’s cash value account.

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 coverage: term and permanent policies. Term policies typically cost less, but they only provide coverage for a certain period of time (the term). These policies may be most beneficial for those who only want coverage for a set number of years, such as when their children are young and dependent needs are at their greatest.

Permanent policies stay in force for the duration of your lifetime in most circumstances, as long as premiums are paid, and are often associated with a cash value account, but are commonly much more expensive than term policies, since an eventual payout is more likely.

Life insurance companies offer several different types of permanent policies:

Age

The younger you are when you purchase life insurance, the lower your premium will typically be, on average. Why? Your life insurance company calculates your rates largely based on life expectancy, and will typically set lower payments to account for the reduced risk of an earlier passing.

Sex

In the U.S., women live an average of five years longer than men. Life insurance companies may factor this into premium calculations, in addition to considering health complications that may be associated with one gender more than another. As a result, women may pay lower life insurance premiums than men, depending on their preexisting conditions and age.

Health

Most life insurance policies require a medical exam. This is your insurance provider’s way of making sure that the information listed on your application is accurate and that you don’t have a preexisting condition that would drastically shorten your life expectancy. Examples of preexisting conditions that could increase your premium include: type 1 diabetes, high blood pressure and asthma.

Overall, the healthier you are, the less you’ll likely pay for your life insurance policy. If you want to potentially lower premiums on life insurance, you might want to consider focusing on maintaining a healthy diet, exercising regularly and to quit smoking.

Lifestyle

The way you live impacts your risk level in the eyes of insurers. Life insurance providers typically raise your rates to compensate for the risks associated with a dangerous lifestyle, such as a risky occupation or extreme hobbies. If your job is inherently dangerous, such as washing windows on skyscrapers, there may not be much you can do to offset the cost of life insurance. However, if you engage in more extreme hobbies or activities, such as motorcycle riding, bungee jumping, skydiving or smoking, you may consider making lifestyle adjustments. Cutting out risky activities may help you lower the cost of life insurance significantly.

Riders

Life insurance riders, also called endorsements, are designed to add certain policy benefits to make a life insurance policy work better for your specific needs. While they may not lower the cost of your premium, they could add additional value to the policy, making your cost even more worthwhile. Common life insurance riders include:

  • Long-term care rider
  • Term conversion rider
  • Waiver of premium rider
  • Terminal illness rider
  • Disability income rider
  • Child benefit rider

Frequently asked questions

    • Most people who are shopping for life insurance are looking to purchase a policy from the best life insurance company. However, not all life insurance providers are created equal, and the best life insurance company is different for each individual.

      For example, the provider that has the best customer service and the most riders might only offer a small selection of policies. Similarly, the best provider on paper might have the most expensive rates that are outside of your budget.

      The only way to find the best life insurance carrier for you is to compare multiple companies using criteria like cost, coverage types, third-party ratings, riders, policy limits and other factors that are important to you and your family.

    • Life insurance might be worth it if you are looking to financially support your dependent family members in the event of your death. If you were to pass away, the funds from your policy could help your surviving spouse pay off the mortgage, support your children and continue living a similar lifestyle in the absence of your income. Life insurance can also be used to leave money to your heirs or a charity of your choosing.

      On the other hand, life insurance is not worth it for everyone. If you have no financial dependents, have paid off your debt and have money saved, you may not benefit as much from a life insurance policy. Before buying life insurance, it’s a good idea to get quotes to see what you’ll pay, then assess your financial situation to look for gaps. You might also want to consult with a certified financial planner to see if it makes sense. If you’re confident that your loved ones would remain financially stable after your passing, you might not need a life insurance policy.

    • Life insurance is not just for adults. Parents and caregivers can also purchase life insurance for their young children. Child life insurance works similarly to adult life insurance. If the child passes away before they reach adulthood, the parent’s policy would provide a payout that could be used to pay for funeral expenses or final medical bills. When you consider that the average cost of a funeral in the U.S. is between $7,000 and $10,000, it can make child life insurance sound like a good investment.

      However, child life insurance has pros and cons. One of the biggest benefits of child life insurance is that the rates are usually very low. When you purchase a policy for your child, the rate is locked in, and they can typically convert the policy into permanent coverage when they become an adult. But the downside is that it’s a financial commitment. You must continue to pay the premium until the child reaches the age of maturity. In addition, child life insurance often has low coverage limits.