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

Life insurance has its own language. Words like beneficiary, rider, and underwriting come up frequently when you’re shopping for 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, it’s “premium.” This word is important because it has everything to do with what you’ll pay to keep your coverage in place.

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

What is a life insurance premium?

Simply put, “premium” means 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 insurance company would pay your family if you died unexpectedly. So if you can’t pay your premiums, your family will no longer be protected. That’s why it’s so important to get a policy with premiums that you can afford.

Premiums can be paid annually, quarterly, or monthly (Haven Life currently offers monthly payment).

How are life insurance premiums determined?

Calculating a premium can seem a little mysterious. In the past, when people bought life insurance by filling out a paper application, taking a medical exam and waiting a few weeks to hear back from the insurance company, 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.

When you use an online insurance agency such as Haven Life, this risk assessment happens in real time as 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

Whether you choose a term life or a whole 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, 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, a whole life policy usually costs a lot more than term life coverage, especially if you’re young and healthy.

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

For most people who are young and healthy, term life insurance offers the most 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/or 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 term. It makes sense: Getting coverage for 30 years will cost more than getting coverage for 20 years. 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 mortgage and your house will be paid off in 20 years, getting a 30 year policy might add unnecessary coverage 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’d be paying a premium that’s too high. What if you don’t know how much coverage you need? A life insurance needs calculator is a great place to start.

Your age

Generally speaking, younger applicants have access to lower 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 policy, issued by MassMutual, for around $21 per month. A 40-year-old man in excellent health would pay about $30 a month for the same coverage. That’s a difference of about $100 a year and more than $2,000 throughout the life of the policy.

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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, and even your family’s medical history when you apply. 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.

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 premium tax deductible?

You can 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. Since you aren’t paying interest on the premiums, they aren’t tax deductible.

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 tax-free. Even if your coverage was $500,000 or $1 million, your partner 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 the 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 coverage amount that are right for your needs.

Will my life insurance quote match my premium?

A quote is an estimate based on the initial information that you provide, such as your health self-assessment, your age, your gender, etc. This helps 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 quote that’s guaranteed to match your 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 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 an 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 their loved one. Insurance companies invest the remainder of their income from premiums to maximize profits.

Rating agencies regularly investigate the way life insurance companies spend income that’s derived from premiums. High ratings, such as those of Haven Life’s parent company MassMutual, 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.

Just another bill yet so much more

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 financial stability for your loved ones.

That’s important stuff, 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 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 a worthy cause.

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Financial strength ratings are as of April 5, 2018, and are subject to change.  A.M. Best Company: A++; Fitch Ratings: AA+; Moody’s Investors Service: Aa2; Standard & Poor’s:  AA+. Ratings are for Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001, and its subsidiaries, C.M. Life Insurance Company and MML Bay State Life Insurance Company, Enfield, CT 06082.

Haven Term is a Term Life Insurance Policy (ICC15DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively through Haven Life Insurance Agency, LLC. Not all riders are available in all states. Our Agency license number in California is 0K71922 and in Arkansas, 100139527.

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