One factor to consider while trying to choose the most suitable life insurance policy is the amount that you will be paying for coverage, and whether this amount will change or not. This amount is also referred to as a premium. Some types of policies will have fixed premiums that remain the same, whereas others will be subject to increases. We’ll start by explaining the meaning of an insurance premium, followed by a look at two of the most common types of life insurance policies, how premiums are determined, and factors that affect the cost of your premium.
What Are Life Insurance Premiums?
A premium may also be referred to as a payment. A premium is the cash amount that you need to pay for your life insurance policy coverage. Whereas the death benefit, or payout, refers to the amount of money that your beneficiaries will receive if you, as the policy holder, passed away unexpectedly. Life insurance policies typically offer flexibility in terms of how often premiums will be deducted. You may usually choose to pay for your life insurance premium on an annual, quarterly, or monthly basis
Life Insurance Types and Premiums
The cost of life insurance premiums varies depending on the type of life insurance policy. Term and whole life insurance policies are most common. Term life insurance policies usually offer more affordable premiums.
Term life insurance premiums are paid for the duration of a specified period, which is determined when you purchase a policy. Premiums typically stay the same for the duration of policy term.
Premiums for whole life insurance are required as long as the policy is active. The premium amount for whole life insurance policies increases annually.
Factors That Affect Life Insurance Premiums
Whether you're looking for term or whole life coverage, age is the most significant factor impacting your premium, as life expectancy is the most crucial indicator of risk. Premiums typically increase between 8% and 10% per year of age. Although annual increases in your 40’s may still be as low as 5%, whereas if you’re past 50 it may be as high as up to 12%.
Other factors that typically affect premiums include:
● Gender: Compared to men, women tend to pay lower rates because women live longer on average than males of the same ages.
● Lifestyle: Thrill seekers beware, as risky lifestyles may significantly increase life insurance premiums.
● Traffic and driving offenses: If you have a history of traffic offenses or driving while inebriated, your insurance prices will most definitely skyrocket.
● Smoking: Smoking increases the risk for a variety of health problems that may shorten an individual’s lifespan, resulting in higher premiums.
● Health: Most plans include screening for health disorders such as heart disease, diabetes, and cancer, as well as other medical metrics that might suggest risk.
● Family medical history: If you have a history of chronic illnesses or other serious medical conditions, in your immediate family, you have a substantially increased chance of acquiring specific disorders.
How Do Insurance Premiums Change As You Get Older?
A term life insurance policy's yearly premium is calculated when the policy is taken out, and is fixed for the policy’s whole period. The premium will remain the same for the duration of the policy term. Instead of increasing premiums on an annual basis, term life policies are able to maintain stable prices by spreading the premiums you’d be paying over a specified period of 10, 20, or 30 years, and average them into one payment.
The same premium amount will be charged every year, instead of jumping from very low to very high premiums as you get older. If an existing term policy's period ends, you may be subjected to extremely high premiums, depending on your age. If the policyholder lives longer than the policy’s specified term the insurer needs to modify the premium amount to reflect their present age.