Life Insurance Premiums, and how they work. What are they and how much should you pay?
People have many questions about life insurance premiums. To save them time, so we can save everyone money, this post is a go-to resource that answers the key questions about the types of life insurance premiums, as well as the rules governing each of the different options.
There Are Three Types of Premiums:
- Level (Term Life)
- Fixed (Whole Life)
- Flexible (Universal Life)
Several factors influence the cost of life insurance premiums, including:
- Tobacco Use
- Face amount
- Policy type
- Term Length
- Health History
- And most importantly your Rate Class.
Depending on what rate class you receive, which is determined after the entire underwriting process is complete, will determine the cost of the typical life insurance premiums you will pay. There is no other factor as important as to the cost of your life issuance premiums as your rate class. Our Buyer’s Guide to Life Insurance addresses how important a life insurance rate class is, in exhaustive detail. So you should read that carefully.
For all intents and purposes, there are four rate classes and two rate classes for smokers:
- Preferred Best (“PB”)
- Preferred (“P”)
- Standard Plus (“SP”)
- Standard (“S”)
- Preferred Smoker (“PS”)
- Standard Smoker (“SS”)
Here is an example from our exclusive Quote Engine, which illustrates how premiums increase as rate classes increase.
After Preferred Best, there is, approximately, a 12.5% increase in the cost of life insurance premiums for each class. That difference can even exceed 100% for a Standard rate premium. Knowing these facts is essential, and having an independent life insurance professional explain this information to you is crucial because you deserve to understand – and you may need to adjust your coverage or the type of policy you buy – once you know the cost of your premiums.
Life insurance premium definitions
Please note: There are Substandard rates that customers can purchase if they want life insurance. The rates correspond to applicants with preexisting medical conditions, requiring these individuals to pay a surcharge for life insurance. Their respective ailments make it more expensive for them to get life insurance, which is why the cost of coverage is higher.
If you are such a person, you can nonetheless find out if you are eligible to purchase life insurance. You can get the facts to govern the underwriting process, and review the variables of each rate class by reading the content on our site about High Risk conditions.
Flat Extra Premiums.
A Flat Extra premium involves a risk (or a set of risks) that a typical life insurance rating system does not address. Take, for instance, the case of an applicant who has a particular form of cancer. He or she may have but one option, which is a Flat Extra rating. If an insurer concludes that this same applicant has a strong likelihood of recurrence during the first six years of having life insurance, a carrier will use a Flat Extra rating to lessen that liability.
Can My Premiums Change after I Have a Life Insurance Policy?
If you have Fixed or Level coverage, your life insurance premiums will not change. But premiums can increase over time with a Universal Life policy if that policy does not offer a guarantee on the premiums you will have to pay.
The costs of insurance associated with Universal Life Insurance are the result of an annual renewable term.
For example: As you age, the cost of life insurance will increase; and, if you do not pay the full amount of the premiums you owe (to cover the cost of increase), an insurer will reconcile the difference by taking money from the cash value you have in your policy – the cash value of your life insurance will decline – to resolve this divide. If you do not have a satisfactory cash value to fix this debt, you will then receive a notice from your insurer about an increase in your premiums to keep the policy alive.
Term Life Level Premiums.
Level Term is the most common – and the most sold, by life insurance agents – type of Term Life Insurance. Most insurers offer Level Term policies that last, respectively, 10, 15, 20 and 30 years. Upon completing the underwriting process, and approval of your application, you can secure your rates for the duration of the term. Your premiums can never increase in a Level Term once the policy is approved – even if you later become ill or infirm.
Whole Life Offers Fixed Premiums.
This policy has fixed premiums and will last for the duration of your life unless you use one of several features like paid-up additions, or a 7, 10 or 20 payment option.
Universal Life Offers Flexible Premiums.
A policy with sufficient cash value enables you to skip premium payments if that is an option you choose or need to exercise. The payment will be subtracted from the cash value of your policy to cover this cost.
Life Insurance Premium Payment Options:
When you buy your life insurance policy you will have several payment options. The first four (see below) are the most common, while the last three also serve an important purpose.
- Monthly Premium
- Quarterly Premiums
- Annual Premiums
- 7 Pay Premium
- 10 Pay Premium
- 20 Pay Premium
Can You Stop Paying Future Premiums?
Whole Life policies have riders that enable you to stop paying your life insurance premiums. Since the policy is a fixed premium, you cannot skip payments like you can in a Universal Life policy.
Paid-up Additions are available as a rider to a Whole Life policy. You may exercise this option in future policy years. You will have to accept a reduced death benefit, but you will never have to make a premium payment again.
Extended Term is a type of life insurance rider, which allows your insurer to take the cash value remaining on your policy and use that cash to buy Term insurance. You will then have life insurance coverage for a particular period of time, and you get to preserve the entire death benefit of the policy. This option is very helpful when you can no longer afford to pay your premiums, or when you do not want to make further payments on the policy but you want to maintain the coverage.
What Happens If You Miss a Payment on Your Premiums?
That outcome depends on whether you have Level-fixed or Flexible premiums. Most life insurance companies will give you a 30-day grace period in which you can reinstate your policy. It is crucial that you check the rules of your individual life insurance policy.
After the grace period expires, the policy will lapse. Unless you have a Universal Life policy with flexible premiums, and have enough cash value to sustain the cost of insurance relating to your premiums, the policy may end.
Why You Need an Independent Life Insurance Professional to Guide You through this Process.
As this overview demonstrates, life insurance is a complex and highly technical subject; it requires mastery of the material, so to speak, which not every life insurance agent possesses. Only an independent life insurance professional – only someone with the freedom to present you with all the options available to your specific situation, based on your age, health, budget, and financial expectations – can make this information easy to understand.
More importantly, that expert can act as your advocate – that is precisely what Local Life Agents does – ensuring that you have the right answers to the questions you deem the most relevant, according to your goals and in accordance with your desire to protect your friends and loved ones.
An independent life insurance agent is, therefore, intelligent and respectful: He or she makes this topic accessible, while customizing a series of choices to complement your priorities.