A life insurance premium is a payment made to a life insurance company, to pay for a life insurance policy. One way to look at paying premiums is the cost of life insurance, but the cost of insurance and the premium due are not always the same due to things like dividends.
Premiums must be paid to the insurance company for a life insurance policy, otherwise the policy will expire. Sometimes paying premiums is more than the minimum required to maintain life insurance. Different types of policies have very different costs, and permanent life insurance has higher premiums than life insurance. Payments for a policy can vary in structure. For example, some policies have only one payment, some are structured so that payments last a few years, general type policies have flexible timing and dollar amount of premiums, or some policies have a flat premium for the entire life of the policy.
If you are not sure what premium is due for your policy, contact your life insurance company or agent.
How much does life insurance cost?
Life insurance costs vary greatly depending on the type of policy and the age of the insured person. Here is an example of annuity:
|Nominal amount||Policy type||age||excellent|
For more information on pricing, you can see our life insurance quote post, or get a quote.
How do life insurance companies calculate your premium?
Premiums are calculated differently depending on the type of policy and features and objectives of the policy, but at the most basic level premiums are calculated based on a few factors. These factors include the age of the insured, the health rating of the insured, the length of the policy and the type of life insurance, and the nominal amount of the policy (amount insured).
The older the insured person, the higher the cost of insurance. Life insurance companies take into account half of your birthday when calculating your age because they are rounded to the nearest age. So if you are 32 and 6 months old, you will be considered 33 for policy age purposes. As people cross the age of 50, life insurance premiums will typically rise in an accelerated fashion for each additional year of life.
Life insurance companies assign a health rating to each individual so that they can be grouped in a way that creates a group of people with roughly the same risk of death. A health rating determines the cost of insurance because a poor health rating presents a greater risk of death, and therefore a greater risk for the life insurance company to pay a claim.
Length of coverage or type of document
Policy length is important when the policy is life insurance. This is because the longer a life insurance company guarantees coverage, the greater the risk they are exposed to when they need to pay a claim. This is especially true for policies that expire when the insured person is over 70. The type of life insurance is important because permanent forms of life insurance such as whole life insurance will always pay a claim (as long as the owner pays the premiums). So permanent life insurance is a bit more expensive than term life insurance in terms of the annual premium due. Over time, permanent life insurance can actually be less expensive than term because dividends and cash value can grow in the policy and used to pay insurance premiums.
The nominal amount is important because the more coverage a life insurance policy provides, the greater the risk to a life insurance company. Premiums rise proportionally with each additional dollar of coverage assuming all other factors are the same.
Ultimately, the life insurance company calculates the risk any policy will eventually pay, and how much debt they owe if the insured person dies. The higher the risk to the company, the higher the premiums.
Other factors affecting insurance premium
There are some additional factors that can affect the amount of premium due. These include additional features of the policy known as riders and how the policy was designed if it was a perpetual insurance.
For any type of life insurance, fringe benefits known as riders can cost more money. Different riders may add a waiver of premiums payable during a disability, income during a disability, an urgent death benefit during a terminal illness, or even long-term care insurance. Variable and blanket policies may have premiums that guarantee minimum monetary values if certain conditions are met. Each of these benefits may provide additional protection for the insured person, and additional risk for the life insurance company. For this, they charge more.
Permanent life insurance policies can be structured differently, and are tailored to suit the owner’s preferences. For example, by design, a whole life policy may only require one single payment. Comprehensive and variable life insurance allows for flexible premium payments according to the owner’s preference and performance of the cash value calculation. Life insurance pays dividends, and those dividend payments can be used to offset premiums if desired. Sometimes policies are designed to have higher premiums in the early years so that the monetary value grows more quickly over time.
Premiums for each type of life insurance
life insurance premiums
Term life insurance does not build a monetary value. Therefore, the premium paid to the insurance company only covers the insurance cost of the life insurance policy. Life insurance premiums are the lowest among all types of insurance policies for this reason. If an amount greater than required for a life insurance policy is paid, the excess will usually be kept in an account similar to an escrow account, and future premiums due will be drawn from this account.
Full life insurance premiums
The premiums paid for full life insurance policies cover the cost of insurance just as they do with term insurance, but the premium payments are higher than the same coverage for death benefits. The reason premiums are high is that whole life insurance is guaranteed to build cash value at a certain rate, as long as all premium payments are made on time. Premium payments above the amount detailed in the initial illustration can be made, but the excess is kept in what amounts to an escrow account, which will pay the specified interest rate. Overpayments do not enter into the policy at repayment, but future premium payments will be drawn from the escrow account.
Comprehensive and variable life insurance premiums
Premium payments for universal life insurance and variable universal life insurance policies are flexible in nature, as long as the cost of the insurance is covered by the payment of the premium or at the current cash value of the policy. These policies tend to benefit clients most when premiums are paid in excess of the insurance cost during the first years of the policy. This is because excess premium payments create a large cash-value reserve, which grows either at a guaranteed rate in the case of universal life insurance or at market returns in a variable universal life policy.
Pictured installments vs. minimum installments payable
With whole life, universal life, and variable universal life insurance policies, sometimes a larger premium payment than required by the life insurance agent is illustrated in the original illustration. This is because the intent of the policy is to build cash value at a faster rate to get a higher IRR, or because annuity payments are intended to stop after a certain point, and enough cash value must be built to finish the payments.
While you may pay more than the minimum amount owed to cover the cost of life insurance, that doesn’t mean your premiums are lost, or go into the insurance company’s pockets for no reason. Premium payments that are larger than required may help you stop paying your premiums sooner than required, or they may create a higher internal rate of return, or a higher overall policy return in your favour.
Sometimes the rates of return shown are assumed, and the policy can perform better or worse than the illustration. This means that sometimes customers have to pay insurance premiums for a longer or shorter period than expected, and the rate of return on the policy may differ from the amount shown. An ethical insurance agent always explains life insurance policies using conservative assumptions, so the policy is likely to be better than the client’s expectations.
Failure to pay the required installment
Failure to pay the premium when due will result in the life insurance policy entering the grace period. This is the period of time after the missed premium payment when the policy has not lapsed but will be lost if the payment is not made. If the premium is not transferred to the insurance company within the grace period, the life insurance policy will lapse and must be returned to resume coverage, if permitted.
If there is sufficient cash value in the policy, the missed payment of the premium often reduces the value of the cash back by the amount of the premium due. This means that premiums may sometimes be missed in monetary value policies. Life insurance premiums must always be paid by the due date, or the policy will immediately go into grace period status.
Limits on the amount of premium payments that can be made
All forms of permanent life insurance have rules regulating how much money can be paid into an insurance policy. There are two separate restrictions that premiums must adhere to in order for the contract to remain considered life insurance.
The first is the TAMRA 7 payment limit, which limits the amount of money that can be added to a life insurance policy during the first seven years of life insurance policies. If these limits are violated, the policy will become a Rate Escrow Contract (MEC). Modified endowments are subject to different tax rules than life insurance.
The second limitation that all life insurance companies must adhere to is the indicative premium limit. The indicative premium limit is calculated at issuance and is based on the insured’s age, health rating, cost of insurance, and the face value of the policy. The life insurance company cannot legally accept a premium greater than the specified guideline limit and must return any excess to the payer. The guideline limit increases every year a document of the same value, the accrual amount is called the annual guide premium limit.
How to reduce your payment premiums
There are ways to reduce your premium payments, depending on the type of policy you have and want. Here are some of the best ways to lower your payments:
- Switching from permanent life insurance to term insurance. Life insurance is the cheapest form of life insurance.
- Reduce the amount on your face. Most life insurance companies have no problem doing this and the premiums will be reduced roughly proportionately.
- Compare bids on new policies to see if you can lower your costs. Life insurance rates generally decline over time, but once your policy is issued, premiums are often at a level.
- Dividend options change the whole life policy. You can direct dividends to offset premium payments. In the end, the dividend may pay the entire premium.
There are other ways to lower premium amounts in addition to these, but it depends on the exact type of policy you have. Please check with your life insurance agent for the best methods, given your specific situation.
Understand your premium
Life insurance premium is defined as the amount an individual pays for a life insurance policy. Simply put, “premium” means payment.
We always recommend to our clients that they fully understand their premium payments, why they are of such magnitude, and how this compares to the cost of insurance. Always have a clear understanding of how long premiums are to be paid, and the assumptions made in this calculation.