What is a life insurance premium?

Premiums are what you pay for protection.

Logan Sachon

Logan Sachon

Published October 15, 2018

Buying life insurance is buying coverage and protection for your family. You pay for it by making payments monthly, annually, or semi-annually for the duration of your policy.

These payments are called premiums. Your premiums are set by your insurance company and are based on a number of factors; for most policies, once your policy is signed and confirmed, your premiums are set for the term of your policy.

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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 life policy for the policy’s duration.

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.

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 term insurance expires and you no longer pay premiums or have coverage. (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, but they’d be significantly higher.)

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 8% 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.

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 carrier.

The most commonly accepted forms of payment are electronic funds transfer (EFT) and check, though other forms may be available from your carrier. Most life insurance companies do not accept credit card payments beyond the initial payment, and no carriers accept cash.

Read more about how to pay for life insurance premiums.

Are life insurance premiums tax-deductible?

Whether or not you can deduct life insurance premiums is one of the most common questions asked about life insurance. You can deduct student loan interest and mortgage interest, maybe you can deduct insurance premiums?

Unfortunately, the answer is no. Your life insurance premiums aren’t 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 exceptions: if your employer is paying your premiums, the death benefit would be subject to taxes. Also, if the death benefit is paid to an 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.

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 six to 10 times as expensive as term life insurance policies. Term life insurance is much cheaper, the best option for most people.

2. Coverage amount

More life insurance coverage, 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 change the nature of your life insurance coverage or add additional coverage. While some riders are free or included with your policy, others can increase your premium amounts, some significantly.

Examples include:

  • Long-term care riders
  • Return of premium riders
  • Waiver of premium rider
  • Critical care riders

Read more about life insurance riders.

Life insurance quotes vs. life insurance premiums

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

Life insurance premiums are set by the insurance carrier 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 medical questions you answer.

When you apply for quotes with Policygenius, you give information 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 and the carrier will request your medical records from your doctors.

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 lower your term or death benefit to make your premiums go down. Once you sign the paperwork and pay your first month’s premium and your insurance company confirms your policy, your premium rates set for the duration of the policy.

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 the you have a level 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 is technically a term policy, but the term is just one year. 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, and then get ready to apply. The price you’ll pay in premiums is well worth the peace of mind you’ll receive.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.