A Quick Guide to Understanding Life Insurance Premiums

Written by Kim Wilhelm

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Last Updated 14 Apr 2024


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We all know what life insurance is and the benefits that come with a life insurance policy. 

However, most of us fall short when it comes to knowing life insurance terminology. 

This may not seem like a big problem, but it can cost you big time. 

Therefore, if you’re considering buying a life insurance policy, you should always start with the basics. 

In today’s article, we’re going to talk about premiums, and the place they hold in the world of life insurance (or the world of insurance, for that matter).

What Does “Premium” Mean in Regards to Life Insurance?

A life insurance premium is the amount you pay to an insurance company to get coverage. 

In other words, it is the price you pay for a life insurance policy. 

It is paid in the form of monthly, quarterly, or yearly installments (depending on your policy terms) to continue receiving the benefits or to continue to be covered by the policy. 

How Is the Life Insurance Premium Calculated?

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When you’re first searching for life insurance, it may seem that the company picks a random price for the premium. This is not the case. 

The premium that a policy holder pays for life insurance depends on various factors.

However, it all essentially comes down to one thing - risk.

The insurance company wants to determine how big of a risk it is taking by giving you all the benefits of a life insurance policy. 

The greater the risk a company sees, the higher your premium will be. This is determined by the following factors:

Age

Unless serious health issues are involved, younger applicants get lower life insurance premiums than older applicants because they are less likely to die anytime soon. 

This is why experts emphasize getting insurance as soon as you become eligible. 

Every year you spend without life insurance increases the premium you will be paying for your policy later on.

Gender

Life insurance premium rates are typically higher for men than women because, statistically, the death rate is higher in men, across various age groups, than in women. 

Men also have a shorter life expectancy. The average life expectancy for men in the US is 74.5 years, whereas for women it’s 80.2 years.  

Health Condition

The health of the applicant is another factor that insurance companies give great importance to while calculating the premium for life insurance. 

The reason for this is simple - your health condition is directly proportional to life expectancy. 

While no one can accurately predict how long a person is going to live, healthy people are expected to live longer, which means the risk is lower for the insurance company. 

This is why premium rates for those in good health are lower than for those with pre-existing health conditions.

Health Risks

If you do not have any current health problems BUT have a higher propensity to develop one, your premium rates will spike. 

Your risk for developing health issues is estimated from you and your family’s medical history, as well as your habits. 

If you smoke, use drugs, or are an alcoholic, you will be considered a high-risk individual. This is because you are more likely to develop health issues down the road, even if you’re healthy at present.

In other words, the risk of developing health problems is higher in individuals with unhealthy or harmful habits than in those without them.

Occupation and Lifestyle

The underwriters at the life insurance company you’re considering buying the policy from will also inquire about your job and lifestyle to calculate your premium. 

This is because certain professions put people at a higher risk of developing certain health problems or unexpected death. The same goes for lifestyle. 

For example, a fireman or a roofer is a higher risk individual (with more chances of sudden death) than an accountant. 

Transversely, an ER professional or a doctor may have more chances of catching a disease than a software engineer or a writer.  

Similarly, a person who goes out hiking or hunting every week, month, or frequently is at a higher risk than someone who likes to stay home or has non-risky hobbies. 

You might even be refused life insurance by some companies for having certain life-threatening hobbies.

Needless to say, people with risky jobs and lifestyles will have to pay more in terms of premiums than those with safer jobs and hobbies.

Type, Amount, and Length of Coverage

Another factor that can impact your life insurance premium is the type of coverage you choose. 

The longer the duration of your policy and the higher the payout it offers, the higher your premiums will be. 

For example, the premium for a term life insurance of 20 years will be lesser than the policy that gives you coverage for 30 years or whole life. 

Similarly, a policy that gives you overall coverage of let’s say - $500,000 - will have comparatively lower premiums than the life insurance with a $100,000 coverage.

Driving Record

Though it is not always considered, some companies do take a quick look at your driving record when calculating your life insurance premium.

The reason is the same as above; companies are constantly assessing the risk to your life. 

If you have a history of traffic violations, such as speeding or driving under the influence, this can cause you to pay higher life insurance premiums. 

Is There Any Age Limit to Get Life Insurance?

There is no universal maximum age limit for life insurance; every company has its own criteria.

However, it is the general rule worldwide that the older you get, the higher it becomes for you to get a life insurance policy. 

Even if you find a company ready to underwrite your life insurance at an older age, you will have to pay high premiums. 

Remember that the older you are, the higher your insurance premium will be. 

If you plan to get a life insurance policy, it’s best to get it as early in life as you can.

Are Life Insurance Premiums Negotiable? 

Premiums are non-negotiable. However, you may be able to lower them by reducing your risk score. We realize that it may not always be possible, but it often is.

For example, you may opt for a longer-term or lower coverage amount.

Moreover, if you have an unhealthy lifestyle, harmful habits, or dangerous hobbies, you could eliminate these risks to lower your premium.

Is Life Insurance Premium Tax Deductible?

The life insurance premium is usually not tax deductible. However, there are a few exceptions.

You may be able to claim tax deductions on your life insurance premiums under the following conditions:

You have group-term life insurance. The IRS allows for tax deductions on group-term life insurance that several small businesses offer. However, it’s only applicable to the first $50,000. If the total coverage amount exceeds it, it’s subjected to taxes.

You have a 162 executive bonus plan. Applicable to executive employees, this regulation allows business owners to deduct life insurance premiums from an individual’s salary if that employee reports it as taxable income.

You’re giving away life insurance in charity. If you’re transferring the rights of your life insurance to a charity organization, all the premiums (paid before the transfer and after) become tax deductible. 

You have an old alimony agreement. If you’re bound to buy life insurance as part of your alimony agreement that was made before 2019, you may qualify for tax deductions on its premiums.

The Sum Up

Life insurance premiums may sound very complex, but they’re not.

Simply put, premiums are a fee or service charge you pay to a company like Final Expense Direct to get a life insurance policy. 

They appear complicated because they’re based on multiple factors that vary across applicants, resulting in different amounts.

If you wish to keep your premium affordable, get life insurance when you’re young and healthy.

Also, make sure you have no harmful habits, risky hobbies, and an overall healthy lifestyle.

If you need help choosing the best life insurance policy according to your needs, get in touch with us to have a Final Expense Insurance expert guide you.

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