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What is a life insurance premium and how does it work?

Being fluent in life insurance requires some patience, but if there is one term to get extra familiar with, it’s “premium.” This word has everything to do with what you’ll pay to keep your coverage in place.

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The benefits of life insurance are simple. But when life insurance has its own language, how are you supposed to understand it? Words like beneficiary, rider, and underwriting come up frequently when you’re shopping for life insurance coverage. And after a while (okay, sometimes right away) the terms can start running together.

Being fluent in life insurance requires some patience, but if there is one term to get extra familiar with, it’s premium. This word is important because it has everything to do with what you’ll pay to keep your life insurance coverage in place.

What is a life insurance premium?

Simply put, “premium” means a payment. It’s the amount of money you pay your life insurance company in exchange for your coverage. The payout itself (called a death benefit) is the amount of money the life insurance company would pay your beneficiaries if you, the policy owner, died while covered by the policy.

So if you can’t pay your premiums, your family will no longer receive life insurance protection. That’s why it’s so important to get a policy with premiums, think payments, that you can afford.

Premiums for many policies can be paid annually, quarterly, or monthly. Haven Life currently offers policies with monthly premiums.

Learning how premiums work is key to finding coverage that protects your family without putting your monthly budget at risk.

In this article:

What is a life insurance premium?

Simply put, “premium” means a payment. It’s the amount of money you pay your life insurance company in exchange for your coverage. The payout itself (called a death benefit) is the amount of money the life insurance company would pay your beneficiaries if you, the policy owner, died while covered by the policy.

So if you can’t pay your premiums, your family will no longer receive life insurance protection. That’s why it’s so important to get a policy with premiums, think payments, that you can afford.

Premiums for many policies can be paid annually, quarterly, or monthly. Haven Life currently offers policies with monthly premiums.

How are life insurance premiums determined?

Calculating a premium can seem a little mysterious. A premium may have seemed like an arbitrary number handed down from the top of a shiny skyscraper.

In reality, there’s little mystery about how your life insurance company decides on your premium. Ultimately it’s all about risk. How big of a financial risk is the insurance company taking by issuing your policy? The underwriting process seeks answers to that question, and the answers impact your premium: The higher the risk, the higher your premium.

In the past, when people bought life insurance, they filled out a paper application, and waited a few weeks to hear back from the insurance company. When you use an online life insurance agency such as Haven Life, this risk assessment happens immediately after you fill out your application, so you quickly have an idea of how much life insurance will cost. Some of the factors that determine your premium, such as your health history and your lifestyle choices, are personal, but other variables are matters of simple economics that you may be able to control.

Type of coverage

There are different types of life insurance. The most common types are whole and term life insurance. Life insurance costs depend, in part, on the type of policy you pick. Whether you choose a whole life or a term life insurance policy has a significant impact on your premium. A term life policy lasts for a specific amount of time, usually 10, 15, 20, 25 or 30 years, while a whole life policy lasts for the rest of your life – assuming you pay your premiums (there’s that word again). As a result, whole life insurance premiums usually are a lot more than term life insurance premiums.

Also, whole life insurance includes a cash value feature, in addition to the coverage amount. If you’d like to learn more about whole life coverage, Haven Life’s parent company, MassMutual, can help.

For many people who are young and healthy, term life insurance usually offers more affordable coverage. Term life also offers the flexibility young people often need. For example, a 20-year term life insurance policy could cover you while your children are young and you’re still paying off your mortgage. This way you’re paying for the coverage you need when you need it.

Amount of coverage and term length

Term life premiums also vary depending on the length of your policy. It makes sense: Getting coverage for 30 years will cost more than getting coverage for 20 years (the longer the term, the more likely the insurer is to have to pay a death benefit). So choosing a term length that does not exceed your actual needs will save you money. For example, if you’re getting coverage to help protect your family during the term of your mortgage, and your house will be paid off in 20 years, getting a 30-year policy might add unnecessary insurability — and unnecessary cost.

The other variable in this equation is coverage amount. To keep premiums low, don’t get more coverage than you need. You may qualify for a million dollars in coverage at a great price, but if you need only $700,000 in coverage to make sure your family would be comfortable financially without your income, you could be paying a premium that’s too high. What if you don’t know how much coverage you need? A life insurance calculator is a great place to start when determining which insurance product to opt in for.

While purchasing a quality term life insurance policy is easy and simple these days thanks to online buying options, there are some details that you should know about so that you don’t overlook them when it’s time to choose a policy. Policy riders are typically the perfect example of little extras that can throw a wrinkle into your insurance-buying plans.

Life insurance riders are additional features that can be added to a life insurance policy to make it more personalized to meet your individual needs. Sometimes these add-ons are built into the policy, and other times they are available at an additional cost to the policy owner, either in the premium, or when the rider is exercised, if at all.

A common type of rider that you’ll encounter when researching life insurance is the accelerated death benefit. This rider is available for most policies and your life insurance company may encourage you to purchase it when you buy an insurance product. In some cases, your insurance policy may automatically  include this rider in the cost of the premium.and there may be an administrative fee if the rider is exercised.

Your age

Generally speaking, younger applicants have access to lower life insurance rates because the younger you are, the less likely you are to die unexpectedly. Of course, you can’t control how old you are, but you can control how soon you buy your coverage.

If you’ve been thinking about getting a life insurance policy, remember that each year that passes without coverage means you’ll be paying a higher premium when you do buy a policy. If you purchase a level term life insurance policy, like Haven Term, the term life rates remain the same throughout the term of your policy, even if it lasts for 30 years.

For example, a 35-year-old man in excellent health can get a $500,000, 20-year Haven Term insurance policy, issued by MassMutual or its subsidiary C.M. Life, by paying a monthly premium of about $21. A 40-year-old man in excellent health would pay about $28 a month for the same coverage. That’s a difference of about $84 a year and nearly $1,680 throughout the life of the policy. This cost savings is a massive incentive to purchase a policy early on.

Health and lifestyle information

Your health is another key element that underwriters use to calculate your premium.You’ll be asked about your health history, your prescriptions, your pre-existing conditions and even your family’s medical history when you apply. (Some may qualify without needing to take a medical exam — issuing the policy or paying its benefits depends on the applicant’s insurability, based on their truthful answers to the health questions in the application. Most applicants will need to take a medical exam.) Whether you use tobacco impacts your health, so it also impacts your premium. Underwriters also consider things like your occupation and your hobbies. If you’re a roofer, expect to pay a higher premium than an accountant or a college professor. If you go out hunting on the weekend, you’ll have a higher premium than someone who collects stamps.

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Frequently asked questions about life insurance premiums

Once you have your coverage in place, paying premiums becomes a habit and you probably won’t think much more about them. But if you’re the curious type, here are some common questions people often ask.

Is my insurance premium tax deductible?

You may be able to deduct your mortgage interest, your student loan interest and your donations to the food pantry on your income taxes, so what about your life insurance premiums? In most cases, the answer is no.

But there is good tax news related to life insurance. If you died and your family filed a claim to receive your coverage, typically the payout would be income tax-free. Even if your coverage was $500,000 or $1 million, your partner or beneficiary wouldn’t have to worry about paying taxes on that amount.

Are premiums negotiable?

With something like fully medically underwritten term life insurance, your premium is custom-built for you based on the information underwriters have gathered from your application, medical exam and other databases.

And while you can’t price haggle for your life insurance premium, you can (and should) shop around. When you do this, make sure you pay attention to the ratings your life insurance company has earned. If a company doesn’t rate well with independent rating agencies such as A.M. Best or Moody’s, then you’ll feel less confident about the life insurance company’s claims-paying ability.

And don’t forget there’s a lot you can do to get a lower premium before you get to the underwriting phase. Living a healthy lifestyle for starters, but also making sure you’re getting the term length and the coverage amount that are right for your needs.

Will my life insurance quote match my premium?

Life insurance quotes are estimates based on the initial information that you provide, such as your health self-assessment, your age, your gender, etc. This helps life insurers provide a ballpark figure, giving you an idea of what your premiums would be. However, until you go through the underwriting process, there’s no way to provide a life insurance quote that is guaranteed to match your monthly premium.

That’s because the underwriting process may reveal something you didn’t know about your health. Maybe your blood pressure is higher than expected. Or maybe you’ve had a few speeding tickets in the past couple years. In that case, you’re a higher risk to the insurance company than your initial information indicated, so your monthly premium will be higher.

In addition to providing you with a quote, Haven Life makes it easy and convenient to apply online – meaning you can get your real rate anytime, anywhere and from any device. Often in minutes.

What does a life insurance company do with my premiums?

The premiums you pay become income for your insurance company. Like any business’s income, the money pays for day-to-day operations. Your premiums also help pay claims to the beneficiaries of other policyholders who are going through the grief of losing a loved one. The remainder of their income from premiums becomes profit.

Rating agencies regularly review the financial condition of  insurance companies. Ratings indicate each rating agency’s opinion about the health of their long-term business practices and the likelihood they’ll be around when you need to file a claim. Don’t be shy about looking into these ratings before buying your coverage.

So much more than a monthly bill

A life insurance premium is a payment, just like the mortgage, the utilities, the student loans, and Netflix. But if you died unexpectedly and your family faced financial uncertainty, the premiums you paid would be more than just another monthly bill. They’d offer a doorway to provide a level of financial stability for your loved ones. Also, some life insurance policies offer benefits while you’re still living — Haven Life Plus, for example, is a rider that’s included as part of the Haven Term policy that gives eligible policyholders access to no-cost and discounted offerings including a fitness app, an online trust and will service and more useful stuff for making life less hard.

Life insurance is important, but it doesn’t mean you should put your monthly budget at risk by taking on an expensive premium to make it happen. Shop around, determine your actual life insurance needs, lock in a term life rate that takes advantage of your current youth and good health, and find an insurance provider that best suits your needs.

And each time you make a premium payment (or, rather, see that the premium has been automatically withdrawn from your bank account) you’ll know it’s going to financially protect your loved ones.

It’s not just easier life insurance, it’s an easier life.

Learn about the perks that come with being a Haven Term policyholder.

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About Brittney Burgett

Brittney Burgett is the marketing and communications director at Haven Life, a customer-centric life insurance agency backed and wholly owned by MassMutual. She joined the startup more than five years ago as one of the first ten employees and oversees external communications, content, SEO and various other growth marketing initiatives. Brittney is a passionate leader who believes that managing your financial life doesn't need to be intimidating or complicated and brings that philosophy to all the editorial and brand work at Haven Life. Prior to her role at Haven Life, Brittney worked in public relations, her client list included brands in the tech, food and nutrition spaces.

Read more by Brittney Burgett

Our editorial policy

Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

Our disclosures

Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.

MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.

Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus.html

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