Q

What is a life insurance premium?

A

Premiums are the payments you make annually, bi-annually or monthly to keep your policy active. If you don’t pay your premium, your coverage will lapse.

Buying life insurance means buying coverage and protection for your family. Your payments, called premiums , ensure your policy is active and would pay out a death benefit to your loved ones in case the unexpected happens.

Premiums are set by your insurance company and are based on a number of factors, including your age and health, the type of policy, the term length, and whether you add on any riders. Once you sign your policy and pay the first premium, your premium rates are set for the term of your policy.

KEY TAKEAWAYS

  • Six main factors determine how much you’ll pay for life insurance: type of policy, term length, your age, your health, and any additional riders

  • Life insurance premiums can be paid monthly, bi-annually, or annually

  • Premiums paid for life insurance are not tax deductible

What are life insurance premiums?

To put it simply, you pay your life insurance premiums to keep your life insurance policy in force. As long as you pay your premiums, your life policy remains active for the policy’s duration.

Permanent life insurance premiums

If you have a permanent life insurance policy like whole life insurance, the policy duration is forever (or until you’re well over 100). As long as you pay your premiums, the policy will stay in force.

Term life insurance premiums

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 the policy’s premiums over the course of the term, but after the term is up, your term life insurance policy expires and you no longer pay premiums or have coverage.

How often do you pay life insurance premiums?

Premiums are most often paid monthly, but you can save money by paying annually. Some life insurers offer discounts of up to 2% to 5% if you pay an annual lump sum every year rather than paying each month. Those savings can add up over the course of a few decades.

How do you make life insurance premium payments?

How to make your life insurance premium payments — that is, get your money from your account to your life insurance company’s account — varies by insurer.

The most commonly accepted forms of payment are electronic funds transfer (EFT) and check, though other forms may be available from your insurance company. Most life insurance companies do not accept credit card payments beyond the initial payment, and none accept cash.

→ Read more about how to pay for life insurance premiums

How are life insurance premiums determined?

There are six main factors that determine your life insurance premium rates:

1. Type of policy

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 to receive cash or take out a loan.

Because of this, and the fees involved with whole life insurance policies, the premiums can be as much as five to 15 times as expensive as term life insurance policies. Term life insurance is much cheaper and is the best option for most people.

2. Coverage amount

More life insurance coverage costs more money. The higher your coverage amount, the higher your premiums.

3. Term length

For term life insurance policies, the longer your term is, the higher your premiums.

4. Age

Life insurance rates rise as you age, so generally, the older you get, the higher your premiums.

5. Your health, hobbies, credit score, and other factors

This is the big one. Your health history, family’s health history, results of a medical exam, plus your driving history, credit score, and hobbies, are all taken into account by life insurance underwriters to assign you a health rating that will determine your premiums.

6. Riders

It’s possible to add riders to your policy to add additional coverage. While some riders are free or included with your policy, others can increase your premium amounts.

Examples include:

→ Learn more about life insurance classifications

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Life insurance quotes vs. life insurance premiums

Life insurance quotes are premium estimates that your life insurance broker or company will give you before and during the application process.

Life insurance premiums are set by the insurance company after your application has gone through underwriting, and are the amount you pay for your policy.

To get an idea of how quotes become premiums, there are two stages when you’re likely to be given premium quotes and a final stage when you get an offer with your actual premium amount:

1. Stage one: Online quotes

When you apply for life insurance quotes online, whether directly through a carrier or a broker like Policygenius, the quotes you get are based on your personal information and a series of questions you answer about your health, family history, and driving record and we calculate what we think your premiums will be, assuming there’s no other extenuating information (that’s for stage two).

These quotes are as accurate as the information you have provided; the more information you share, the more accurate your quote will be.

2. Stage two: Updated quotes after phone interview

The second phase of your life insurance application is to talk to a life insurance agent on the phone (life insurance is highly regulated, and this is a must). The agent will ask more questions to get a fuller picture of your health, and this additional information may change your estimated quotes. After your conversation, the agent will share your updated quotes.

At this point, you’ll set up a free medical exam or the insurer will request your previous medical records from your doctors. You may also be asked to provide an attending physician statement (APS).

If you’ve been honest and thorough with your agent and no new information is uncovered in your medical exam or review of your medical records, your application should be approved at close to the rate quoted in this call.

3. Stage three: Offer after underwriting

The insurance company’s underwriters will look at your application, medical exam results, and medical records and assign you an insurance classification, which will set your rates.

While your classification is set, your policy details may not be; you can decrease your term or death benefit to lower your premiums. Once you sign the paperwork and pay your first month’s premium, your premium rates are set and will remain constant for the duration of the policy.

Are life insurance premiums tax-deductible?

Your life insurance premiums are not tax-deductible. But there are a few tax advantages when it comes to the life insurance death benefit In most cases, the death benefit is paid out tax-free.

There are a few exceptions: if your employer is paying your premiums for a group life insurance policy, the death benefit would be subject to taxes. Also, if the death benefit is paid to your estate instead of an individual, the estate would then be subject to estate 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.

What if you can’t pay your premiums?

If you have a life insurance policy in place and can’t pay your premiums on the billing date due to a change in circumstance, insurers usually have a 30 day grace period in place before they cancel your policy. Under special circumstances, they might extend this grace period to be even longer.

For example, during the current pandemic most life insurance companies are extending grace periods to 90 days (and 60 days for some insurers). To get an extension on premium payments, you’ll need to call your insurer and inform them of your present circumstance and how you are impacted financially. They may require supplemental documentation, but for many, a phone call may suffice.

If your insurer offers you a grace period for premium payments, you’ll need to talk to them about setting up a payment plan to pay back the costs.

Can your life insurance premiums change?

If you purchase a term life insurance policy, you’re generally buying a level term life insurance policy, which means that you will have the same premium throughout the length of the policy.

However, there is a less common term life insurance product that that does result in premium changes: annual renewable term life insurance.

Annual renewable life insurance has a term of just one year, though the policy has an option to renew after each year for a set number of years. These policies are cheaper to start, but end up being more expensive over the life of the policy. Another drawback: if you develop a terminal illness, you may be ineligible for renewal.

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 before you apply. The price you’ll pay in premiums is well worth the peace of mind you’ll receive.

Life insurance premium FAQs

How much does life insurance cost?

The cost of life insurance varies depending on your age, health, lifestyle choices, and how much life insurance coverage you’re getting. Term life insurance policies offer affordable coverage.

Is it worth it to buy life insurance?

Life insurance protects your loved ones from financial despair if you die prematurely and can no longer provide for them. Getting coverage is absolutely worth it — for peace of mind and for their financial security.

What happens if you don’t pay your life insurance premiums?

If you miss a life insurance premium payment, most insurers will allow a 30 day grace period. After that, your policy will lapse, which means you’ll lose your life insurance coverage.