Key takeaways

  • A life insurance premium is the rate you pay for life insurance coverage.
  • Life insurance premiums are determined using factors such as age, health, policy type, and coverage limits.
  • Insurers use the money from premiums to cover liabilities, claim payouts, business expenses and investments.

If you’re in the market for life insurance, you’ve likely heard the term “premium,” but what is a life insurance premium? In short, your life insurance premium is the rate you pay for coverage. Your premium varies depending on a few factors, including your age, your health, the policy type and your coverage limits. Below, we’ll explain what you should know about life insurance premiums, including how they’re calculated and when they are paid.

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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 (or until your passing). If you have a term insurance policy, your coverage will vary in term length, but if your life insurance is permanent, it’ll last until your death as long as you pay the premiums. Typically, life insurance premiums are paid monthly, quarterly, semi-annually or annually, depending on how you set up the policy with your insurer.

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 are required to maintain cash reserves used 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 money on hand to cover outstanding liabilities and help 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 the money they have 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. Some people are considered to be high-risk due to lifestyle choices or health conditions. These applicants typically have a higher premium as the insurance company believes they are at a higher risk of premature death. 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 depending on your age, as you might outlive the term policy length and the insurer may not have to pay out a claim.

Certain policies, such as 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 (and thus, your death benefit if it is not paid back).

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 are likely to be most beneficial for those who only want coverage for a set number of years. For instance, a parent may get term life insurance that lasts until their child turns 18 and can become financially independent.

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. Permanent policies 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. 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 sex 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. Making choices to improve your health like exercising or quitting smoking can ultimately lower your life insurance premiums.

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. Riders will typically add to your monthly premium, but allow you to tailor your life insurance coverage to your specific needs and provide coverage in case of specific conditions or occurrences. Common life insurance riders include:

What happens 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 and the type of life insurance you have. Your policy may come with a grace period — a certain amount of time in which your policy will not lapse for nonpayment — although the actual grace period may vary by policy type and company. However, a standard term life insurance policy will typically lapse if you miss a payment and haven’t paid within the grace period. 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. Most policies have a reinstatement period, where you can make up the missed payments to activate your coverage again.

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, and if enough cash value has accrued, so if you forget to make a payment, your policy might not lapse if the cash value is utilized. Be sure to talk to your insurer about this feature, though; a company may not automatically use your cash value to pay the premium, so you may need to authorize this safeguard. Additionally, if money is taken from your cash value account for any reason and not paid back, your death benefit will be reduced.

Frequently asked questions

    • The best life insurance company will vary depending on personal preferences. For example, the provider that has the best customer service and the most riders might only offer a small selection of policies. Or, the best provider on paper might have the most expensive rates. That said, life insurance premiums are highly personalized and don’t vary as much between companies as other insurance product costs do. To find the best life insurance carrier for you, experts recommend comparing multiple companies based on criteria like coverage types, third-party ratings, available 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 family members cover ongoing expenses such as mortgage payments. Life insurance can also be used to leave money to your heirs or a charity of your choosing. Not everyone will need or want a life insurance policy, though. If you aren’t sure if life insurance suits your needs, talk to a licensed agent.
    • If your life insurance premium is high, it’s likely because your insurer views you as a high-risk policyholder. There are several factors that influence your premium, including your health, age, occupation and lifestyle. Older applicants, as well as those with high-risk jobs and hobbies, like scuba diving or roofing. Choosing a robust life insurance policy with high coverage limits or multiple riders can also drive up your premium. Life insurance premiums do not vary as much between carriers as home or auto premiums, but speaking with your insurance agent about your rating factors may help you identify ways to reduce your risk and save.
    • Term life insurance premiums are usually cheaper than permanent life insurance premiums. That’s because a term policy covers you for a certain time period rather than your entire life, and your insurer may never have to pay out a claim if you outlive the policy. That said, term policies with high coverage limits may be just as expensive as less robust permanent policies. Requesting quotes is the best way to identify the cheapest policy type for you.