FROM THE LEARNING CENTER

Understanding Life Insurance Premiums and How They Work

by Bestow Team | December 21, 2021

6 Minute Read

Sometimes it can feel like life insurance is a foreign language, with heady jargon and industry terms galore—and no Duolingo course to help clarify. The good news is that if you’re looking for a translator, you’re in the right place! So sit back (or grab a pole if you’re riding the subway) and prepare to get smart about life insurance. Truth is, it’s actually not that complicated. And the more you know, the better prepared you’ll be to confidently choose a policy with an insurance premium and death benefit that best fits the unique needs of you and your family. Ready? Great. Let’s dive in. 

What Is A Life Insurance Premium?

The basic definition of a life insurance premium is the amount of money you pay for your coverage.  

A life insurance premium works a lot like a car insurance premium, only instead of insuring your Subaru, you’re insuring your life to help provide some financial protection for your family and loved ones should you pass away. After you choose an insurer (the company that issues your life insurance policy) you’ll be prompted to select a death benefit, which is the lump sum of money your designated beneficiaries will receive upon your death. These variables, amongst others, help determine the cost of your life insurance premium.

How Life Insurance Premiums Typically Work

Once you’ve qualified for your just-right life insurance policy and you’ve signed on the dotted line (congrats!), you will start making premium payments. If you go with a level term life insurance policy (a policy with coverage set for a designated period of time, like ten, twenty, or thirty years), you will pay a level premium, which means your premium payment will stay the same throughout the life of the policy. 

Some insurance companies allow premiums to be paid monthly, quarterly, or annually. It is important to pick a policy with a life insurance premium you can afford because if you miss a payment, your policy might lapse which can be grounds for an insurance provider to cancel coverage. Companies can offer some leniency in the form of a grace period of between 30-60 days. Bestow, for example, offers a 60-day grace period, and sends courtesy reminders if a policyholder misses a payment.   

How Life Insurance Premiums Are Calculated

So how are life insurance premiums calculated? Does every insurance company have their own Vanna White on hand to spin the Wheel of Premiums? Not even close. The truth is that the calculating of insurance premiums is a highly regulated affair, so there’s nothing random about it—and that’s a good thing for consumers (like you!).

Factors that can impact your life insurance premium include: 

Amount of Coverage

This one seems self explanatory. If you want a policy that could pay your beneficiaries $1 million if you pass away, you’d expect to pay a higher premium than a policy that only has a $50,000 death benefit. Make sense? 

Lifestyle

This is where risk comes into the equation. Part of what an insurance company is calculating is the level of risk they would assume by issuing you a policy. Sounds morbid, but hey, it’s life insurance. So the bottom line is, if you have riskier hobbies (like drag racing or deep sea cave diving), you might expect to see that reflected through higher premiums. In fact, some insurers won’t cover you if you have certain hobbies. This varies by company. 

Age, Weight, Medical History, etc.

Each time you add a candle to your birthday cake without having a life insurance policy in place, you might be looking at higher insurance premiums. Those who are a bit older, have documented health issues, or smoke cigarettes will likely pay more for life insurance than those who are younger and healthier. If you are in good general health, a non-smoker, active (think jogging, cycling, dancing), and you’re too young to have had a Friendster account, your chances of getting life insurance at an affordable rate are looking pretty good.

Estimated Term Life Insurance Premiums

AgePolicy ValueTerm LengthPremium
25$500k30 years$21.83/mo.*
35$500k30 years$36.00/mo.*
45$500k30 years$60.17/mo*
*Estimated quotes based on healthy female non-smoking Bestow applicants as of 12/7/2021.

 

Many insurance companies require applicants to undergo an in-person medical exam, get a blood draw, and answer a long list of questions about family health history, pre-existing conditions, and lifestyle choices. The information gleaned from this process is used to help determine the cost of your coverage–and it can sometimes take weeks to get an answer. Some companies do let you forego some of that. Thanks to cool technology and fancy math, Bestow offers term life insurance applicants an instant decision online. Instead of weeks, the whole process takes just minutes.

A Quick Note About the Main Types of Life Insurance

When it comes to calculating premiums, the insurer and the type of life insurance product (and its features), all play a role in the highly regulated process of determining cost — and there are lots of different types of life insurance. Before your head starts spinning, take a deep breath. You got this. As a jumping off point, we recommend checking out this article on the difference between whole life insurance and term life insurance. It’s a quick read, we promise. And gaining an understanding of these two popular forms of life insurance should give you some foundational knowledge on which to build.

Premiums Often Depend on Term Length and Amount of Coverage Needed

Picking out life insurance coverage is a bit like reading one of those Choose Your Own Adventure books. The insurance products you select, the insurability of your life (your age, health, lifestyle), and the amount of coverage you purchase can determine how much life insurance will cost you in the end.

If access to cash value is important to you, look into permanent life insurance (though, remember this feature may be reflected through higher premium prices).

If affordability is a chief concern, term life insurance is definitely worth considering. The insurance premiums on term life policies remain the same for the entire life of the policy and they tend to be significantly lower than that of permanent life insurance premiums. Though, term life policies do not have a cash value.

How To Apply For The Best Life Insurance Premium For You

Like with all financial decisions, it’s worth shopping around and finding a partner you trust. When comparing life insurers, check out client testimonials and get a quote to see if they offer the coverage you need at an insurance premium you are comfortable with. 

If you’re raring to get started now, Bestow offers instant quotes for term life insurance. If you like what you see, you can apply online in minutes for up to $1.5 million in coverage to help financially protect your loved ones. If approved, you could have term life insurance coverage today — and maybe some peace of mind, too.

Bestow does not give tax or legal advice. The information provided is not intended to offer any tax, legal or financial advice. It is always a good idea to consult your tax, legal and financial advisors regarding your specific situation. Furthermore, this article does not ensure your eligibility for any specific product.