What are life insurance premiums?

What are life insurance premiums?

Life insurance is different than other things you buy.

After all, there aren’t many other things you pay for where you hope you don’t get to use it. There aren’t many other things you pay for where, after 20 or 30 years, there’s a good chance that nothing tangible comes out of it.

But in other ways, it’s the same as any other transaction: You pay for it, and you get something in return (in this case, peace of mind and a secure financial future for your family).

What you pay are called premiums. You’re familiar with them if you’ve ever used common insurance products like auto insurance or health insurance. But with an insurance type that you use less often – say, life insurance – you might not understand how your premiums play a role in your coverage.

What are life insurance premiums?

To put it simply, you pay your life insurance premiums to keep your life insurance policy in force. If you pay your premiums, you keep your policy.


This is the case with permanent life insurance policies, like whole life insurance: As long as you pay your premiums, the policy will stay in force. With term life insurance, your policy is set for a certain amount of time – the term. Typical terms are 20 or 30 years. You pay for the policy over the course of the term, but after the term is up, your policy expires and you no longer pay premiums. Many policies let you convert your term life insurance into a whole life insurance policy before the end of a term; if you opt to do so, you’d keep paying premiums like normal. We’ll talk about term life insurance premiums and whole life insurance premiums again in a bit.

Premiums are most often paid monthly, but you can save money by paying annually. Some insurers offer discounts of up to 8% or 10% if you pay a lump sum every year rather than paying each month. That can really add up over the course of a few decades.

If you’d like a little behind the scenes, how-the-sausage-is-made insights: Life insurance companies make money and help cover claims by investing premiums they receive. So just like you don’t rely solely on your income but instead put some money into stocks and interest-bearing accounts for when you have to pay a home down payment or for expenses in retirement, life insurance companies invest the same way (on a much larger scale, obviously) to make sure their costs are covered.

Are life insurance premiums tax deductible?

We all want to find anything we can to lower our tax bill every year, right? Insurance premiums seem like a good place to start. That’s probably why whether or not you can deduct life insurance premiums is one of the most common questions asked. After all, you can deduct student loan interest and mortgage interest, maybe you can deduct insurance premiums? Pretty please?

Unfortunately, the answer is no. Your life insurance premiums aren’t tax deductible. In fact, except in a few rare freelancer cases, none of your insurance premiums are tax deductible.

But there are a few tax advantages when it comes to the life insurance death benefit – namely that, in most cases, the death benefit is paid out tax-free. There are a few edge cases, like if the death benefit is rolled up in an estate tax or if your beneficiaries elect to receive it in installments rather than a lump sum, but for the most part the money is paid out without being reduced by taxes.

So while you may not get a tax break when it comes to life insurance premiums, it doesn’t mean every aspect of your life insurance policy is subject to the whims of the IRS.

If you’re still bummed about not being able to deduct your premiums payments from your taxes, there’s actually a way you can get them back entirely. Return of premium life insurance policies do just that: Return your premiums to you after your policy’s term is up in the event you outlive the term. They cost more than your standard term life insurance policy, but if you really want that money back a few decades from now, they’re worth considering.

How are life insurance premium rates determined?

Okay, so you have to pay your life insurance premiums, and you have to pay all of them – no tax breaks allowed. But how does an insurance carrier decide just how much you’ll pay?

There are four main things that determine what your life insurance premium rates are set at:

  • Your coverage amount. The higher your coverage amount, the more you’ll pay each month.

  • Your term length. The longer your policy lasts, the more you’ll pay each month.

  • Your age. The older you are, the more you’ll pay each month.

  • Your health (and other factors). The less healthy you are, the more you’ll pay each month.

After you apply for life insurance, you’ll go through the underwriting process. The life insurance company will look at your current and past health, as well as your family health history, and combine that with information such as your hobbies and driving history. Their goal is to figure out how risky you are to insure – how likely you are to die during the course of your policy. Once they’ve taken a look at all of this and combined it with the other factors listed above, the insurer will classify you and your rates will be set!

Back to term life insurance and whole life insurance for a minute. As we mentioned, whole life insurance policies don’t expire; they keep going as long as you pay your premiums. They also have a cash value component that can gain or lose value over time and which you can tap into, like an investment.

Because of this, and the fees involved with whole life insurance policies, the premiums can be as much as four times as expensive as term life insurance policies. It’s important to know that the type of life insurance you have matters just as much as the factors that go into your individual policy.

Will my life insurance quotes match my premiums?

Obviously life insurance premiums play a big role in your life insurance policy. The amount of protection you’ll receive from your policy – and even just if you can keep your policy in force – will be determined by your life insurance budget and your ability to pay your premiums.

That’s why your life insurance quotes are so important.

Your life insurance quotes aren’t the same binding rates that your premiums are. Instead, the quotes are an estimate – how much you’ll probably pay for your policy, given the information you’ve provided. Quotes are provided before you’ve gone through the whole underwriting process, so they may or may not match the final rates you’ll be offered once the carrier does their due diligence and fully vets your application.

But it’s crucial that the quotes you receive are a realistic representation of what you’ll ultimately be paying. The last thing you want is to be given a final premium rate that’s double what you were quoted, or see quotes that are erroneously high-priced, meaning that you’ll miss out on coverage opportunities because you think the policies are out of your price range.

Life insurance quotes aren’t legally binding. If you get premiums that are wildly different than what you’re quoted, there’s not much you can do except for not sign the policy papers if you still want the coverage (and you probably do, which is why you applied in the first place). You might be especially wary of instant life insurance quotes. How can you get an accurate quote in seconds? It can be a real problem.

That’s why at PolicyGenius, we ask some pretty thorough questions before you get your quotes (and before you even have to give an email address). Upfront, you give information about your health, family history, and driving records – the same sort of information the insurance carrier will get more clarity on later in the application process. The result? 85% of PolicyGenius customers pay a monthly premium that’s within $5 of their original quote.

What causes a quote to differ from the final premium offered by the life insurance company? The simple answer is: New information about you that wasn’t known at the time of quoting. Most commonly, the medical exam indicates differences in weight, blood pressure or lab results than what was provided for quoting. If your weight comes back 10 pounds different than what you said on your quote request, then the final premium offered will be different than what was quoted. On the other hand, if the medical exam confirms everything you said on your quote request, then the final premium offered will be the same as what was quoted.

Life insurance premiums are one of the core elements of a life insurance policy, so it’s important to understand what they are, how they work, and what they mean for your budget. Get some free life insurance quotes to see how you can work a life insurance policy into your budget, and then get ready to apply. The price you’ll pay in premiums is well worth the peace of mind you’ll receive.