Skip to Main Content

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

Asian interracial family discussing life insurance possibilities with agent
Weekend Images Inc./Getty Images
Bankrate Logo

Why you can trust Bankrate

While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for . This content is powered by HomeInsurance.com (NPN: 8781838). For more information, please see our

Shopping for life insurance can be daunting. If researching life insurance providers and policy options for the first time, you may find yourself asking questions like, what is a life insurance premium? How are they determined, and do I pay upfront for the whole policy?

A life insurance premium is the payment that you pay your life insurance company in exchange for your life insurance policy coverage. Typically, you pay your premium once a month or once a year. In the event of your death, your life insurance company agrees to pay your beneficiaries the death benefit you set at the time of purchasing your policy. With some policy types, your premium may also contribute towards portions of your policy that accrue cash value over time.

What is a life insurance premium?

A life insurance premium is the amount of money paid to your life insurance company periodically 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, 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 a payout is much 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 risk associated with a dangerous lifestyle, such as a risky occupation or extreme hobbies. If your job is inherently dangerous, 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

Frequently asked questions

What is the best life insurance company?

The best life insurance company depends on your individual preferences and needs. Are you a smoker? Certain life insurance companies offer guaranteed issue policies that may be convenient in providing coverage for smokers. Do you want the best service available? This could be reflected in the insurer’s J.D. Power score for customer service. Companies vary in their policy options, so a provider’s coverage or rider and endorsement options may be most important to you. An independent insurance agent may be able to help you find the right insurer with the best balance of coverage, cost, customer service or endorsements.

Is buying life insurance worth it?

Depending on your financial goals and situation, what makes life insurance worth it for you could be different. Many people choose to purchase life insurance as a safety net for those who are financially dependent. If your death would put your family in a difficult position financially, you may want to consider life insurance, which can cover outstanding debts or replace critical income.

However, other individuals choose not to purchase life insurance, and instead, choose to save or invest money that could be used in the event of a tragedy. If you do choose to purchase life insurance, one of the first steps to buying a policy is knowing how much coverage you need. Online life insurance calculators and financial advisors may be able to help you make this determination.

Should I purchase life insurance for my child?

Some families choose to purchase life insurance for their children. While the child mortality rates in the U.S. and other developed countries have generally decreased over the past century, some families still prefer to have a financial safeguard against funeral expenses, in case the unthinkable were to happen. The average cost of a funeral in the U.S. is between $7,000 and $10,000, which may not be a sum readily available for some families.

Another reason to consider purchasing life insurance for your child may be to make them more easily insurable in the future. Life insurance premiums are typically cheapest when you’re young. If your child were to develop a health issue in the future, their life insurance premium could remain low if they were able to secure a lower premium during the time they are young and at their peak of health. Many insurers offer the option to convert a term policy into a permanent policy later, which may be advantageous to parents planning for the long-term future of their children.

Written by
Lizzie Nealon
Insurance Writer
Lizzie Nealon is a former insurance writer for Bankrate. Her favorite part of the job is making home, auto and life insurance digestible for readers so they can prepare for the future.
Edited by
Insurance Editor