A life insurance premium is the money paid to an insurance carrier in exchange for which the carrier will pay a benefit, generally upon the death of the person insured, to a beneficiary named in the life insurance policy. The premium amount depends on a number of factors related to the policy, such as the type of life insurance, the probability of the insured’s death during the term of the policy, administrative costs and the agent’s commission. Life insurance premium rates also are affected by the insurer’s financial condition, including such considerations as the company’s ability to pay the claims it anticipates in the short term.
The first factor, the type of life insurance, influences some of the other factors. Some life insurance, called term life insurance, is designed to remain in force only for a set period of time, generally five, 10, or 20 years. The shorter the term, the lower the cost of the life insurance premium, because the likelihood of the insured’s dying in the short term is always less than over a longer term. The life insurance premium for term insurance usually remains at the same level for the life of the policy, although some self-renewing term policies increase premium rates periodically. Once the policy expires, no benefit will be paid upon the insured’s death; this is why term life insurance policies will specify the date and time of expiration to the minute.
Permanent life insurance, also called whole life insurance, has no expiration date; it lasts for the life of the insured, or the insured’s 100th birthday, whichever comes first. If the insured reaches age 100, the policy is said to have matured, and the full benefit is paid to the insured; if the insured dies before reaching age 100, the full benefit is paid to the beneficiary. The life insurance premium for whole life insurance is generally higher because a portion is retained and invested on behalf of the policy, providing the policy with cash value that can be accessed by the policy owner. There are other different kinds of life insurance that incorporate features both of term and whole life insurance, but these are the two main types.
A major factor influencing the amount of a life insurance premium is the risk undertaken by the insurer, or the probability that the insured will die before the expiration of the policy, triggering a benefit payout. This is why term life insurance for young adults is so inexpensive. Since statistics indicate that people in their 20s can be expected to live past age 70, even a 30-year term life insurance policy represents a good risk for the insurer, although the insured’s health and is also a consideration in this category. The premium for whole life insurance is higher because it’s a certainty that the insured will die, but other factors related to the insurer’s financial condition help to keep the cost down. For example, not only do most term life policies expire without any benefit having been paid, many policyholders drop their coverage. The premiums paid for policies no longer in force aren’t profit, but they certainly reduce the cost of insurance for active policyholders because the carrier's ability to pay anticipated claims in the short term is a factor in setting premium rates.
There are other ways a carrier's financial condition affects premium rates. When the economy is good and returns on investments are high, for instance, there’s little pressure on the carrier to raise rates. Carriers who issue property and casualty insurance, as well as life insurance policies, will sometimes experience higher-than-normal claims due to natural causes like hurricanes or earthquakes, and the resulting drain on their cash reserves produces great pressure to increase life insurance premium rates.
Other factors affecting life insurance premium rates are administrative costs and agents’ commissions. Of these, the sales commission is by far the greater amount. Under certain circumstances, for some policies, an agent’s commission can equal as much as 110% or even more of the first year’s commission, although commissions ranging from 40% to 75% of the first year’s premium are far more common.
