How To Evaluate Your Life Insurance Premium

Life insurance is a contract between an insurance company and a policyholder, where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of the insured person. The premium is the amount of money it will cost for you to be insured by a provider. The younger and healthier you are, the lower the premiums will be. Premiums are paid every month, every six months, or annually. Prices can vary due to your age, any health risks you may have, and your driving history, among other factors. If you want to buy life insurance, you need to apply and qualify first. Applying for life insurance typically involves filling out paperwork, taking a medical exam, and providing health histories for you and your immediate family. You can ask for your life insurance premium to be evaluated.

How can I reduce my premium?

There are several ways to reduce your life insurance premium. Here are some strategies to help you lower your premium payments:

When Purchasing a New Policy

• Buy life insurance early on: The younger and healthier you are, the lower the premiums will be. Buying life insurance early on can help you lock in cheaper rates.
• Choose term life insurance: Term life insurance is much more affordable than permanent life insurance, as it is simpler and easier to manage. With term life insurance, you pay premiums for a set amount of time, and your beneficiaries receive a guaranteed payout if you die during that period.
• Lower the face value and/or term length of your policy: If the insurer's offered rate is too high, you can reduce the death benefit and/or shorten the term length to lower your premium costs.
• Pay your premiums annually: Paying annually instead of monthly can help you save up to 5% on your premium payments.
• Compare policies: Compare policies from different insurers to find the most suitable coverage for your needs at the best price.
• Choose the right premium structure: You can usually choose between stepped and level premiums. Stepped premiums are cheaper initially but increase as you get older, while level premiums remain constant but may be more expensive at the outset.
• Opt out of Consumer Price Index (CPI) increases: Life policies are generally indexed for inflation, which can increase your premiums by 3-5% annually. Removing CPI increases will keep your premium payments stable, but your benefit amount will also not increase with inflation.

For Current Policyholders

• Work on your health, then ask for reconsideration: If you've made significant improvements to your health, you may be eligible for reconsideration, where the insurer lowers your rate based on your improved health status. You will need to take a new medical exam, and the insurer will want to see at least one year of health progress.
• Re-shop your policy: Even if your health hasn't improved, shopping around for a new policy may help you find a lower rate with another insurer.
• Reduce your coverage amount: If you've had your policy for at least a year, you may be able to ask your insurer to lower the coverage amount, which will result in lower premiums.
• Change your habits and lifestyle: Adopting a healthier and less risky lifestyle can positively impact your premium payments. For example, quitting smoking, losing weight, reducing alcohol consumption, and avoiding extreme sports or risky hobbies can all contribute to lower premiums.

What are the pros and cons of term vs permanent life insurance?

Life insurance is a contract between an insurance policyholder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of the insured person. There are two main types of life insurance: term life insurance and permanent life insurance.

Term Life Insurance

Term life insurance covers the insured person for a specific period, or term. Terms typically run for 10, 20 or 30 years but can be as short as a few months to a year, and sometimes longer than 30 years. Insurance companies preset premiums for the entire length of a term. Term life insurance rates are generally cheaper than permanent policies because they don't have a savings or investment component, and coverage is only guaranteed if the insured person dies during the term. In other words, after the term expires, so does the coverage.

Permanent Life Insurance

Permanent life insurance supplies coverage for a policyholder's lifetime as long as premiums are paid. Unlike term life, permanent life insurance policies have a cash value component where part of the collected premiums are invested in a tax-deferred account. This acts as a savings account for the policyholder, who can borrow or withdraw from the funds under certain circumstances. Permanent insurance policies tend to be significantly more expensive than term life insurance policies. There are four types of permanent life insurance: whole life, universal life, variable life, and variable universal life.

Pros and Cons of Term vs Permanent Life Insurance

Term Life Insurance Pros

• Term life insurance is cheaper than permanent life insurance.
• Term life insurance offers flexibility in choosing a term that meets your needs.
• Term life insurance can be used to put money toward specific financial goals, such as funding college tuition or paying off a home loan.
• Term life insurance can be a temporary solution until you can afford permanent life insurance.

Term Life Insurance Cons

• Term life insurance policies expire at the end of the term, and premiums could go toward nothing if the policy expires.
• Term life insurance lacks the cash value component of other types of life insurance.

Permanent Life Insurance Pros

• Permanent life insurance lasts for life.
• Permanent life insurance has a cash value component that can be used to pay premiums or take out a loan from the insurer.
• Permanent life insurance is not typically affected by medical concerns that arise after purchasing the policy.
• Permanent life insurance can be a good way to save or invest a portion of your premiums.

Permanent Life Insurance Cons

• Permanent life insurance is usually more expensive than term insurance.
• Permanent life insurance is more complex than term insurance.
• If the invested cash value doesn't perform well, you may incur losses.

What happens if I miss a payment?

Life insurance is a contract between an insurance policyholder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money in exchange for a premium, upon the death of the insured person. The policyholder typically pays a premium, either regularly or as a lump sum.

If you miss a life insurance payment, the consequences depend on the type of life insurance you have.

Permanent life insurance

Permanent life insurance policies often have a cash value that may grow over time. If you stop making payments but your policy has built up sufficient cash value, it could be used to cover the cost of your premiums and keep the policy active. However, if the cash value is not sufficient, your policy will lapse, and your life insurance benefit will end.

Term life insurance

If you miss a premium payment on a term life insurance policy, the grace period begins, after which the policy will lapse. The grace period is usually 30 days, but it depends on your policy and insurance provider. During the grace period, if you die, your beneficiary will still receive the death benefit, minus what you owe.

If you ignore your premium payment during the grace period, your policy will lapse, and your coverage will end. You may be able to have it reinstated, but you will likely have to undergo a medical exam and pay higher premiums.

How to avoid missing premium payments

To avoid missing premium payments, you can pay your premium annually, set up an electronic funds transfer (EFT), or use your financial institution's bill payment service. You can also schedule your premium payments at the beginning of the month, several days before the due date. For large annual or semi-annual payments, you can set up an automatic transfer to a savings account and incorporate the transfers into your monthly budget.

If you're already behind on payments, reach out to your provider and ask about payment options to get back on track. They may be willing to modify the due date or break up past-due premium payments into smaller chunks.

What are the benefits of a physical exam?

A physical exam is a vital component of the life insurance application process. It helps the insurer determine the applicant's health and mortality risk, and the results can influence coverage eligibility and premium costs. While it may be a daunting prospect for some, understanding the benefits of a physical exam can alleviate concerns and encourage individuals to pursue life insurance for financial security. Here are some key advantages of undergoing a physical exam when applying for life insurance:

• Accurate Assessment of Health Status: A physical exam provides an in-depth evaluation of an applicant's health. It includes measurements of vital signs such as blood pressure, heart rate, height, and weight, as well as blood and urine samples for laboratory analysis. These tests can uncover potential health issues that the applicant may not even be aware of, allowing them to seek timely medical attention.
• Determining Insurability and Premium Costs: The results of the physical exam play a significant role in determining whether an applicant is insurable and, if so, what premium they will be charged. Applicants in excellent health are likely to secure lower premiums, as the insurer's risk is reduced. Conversely, those with underlying health conditions may be offered coverage at a higher rate to account for the increased risk.
• Identifying High-Risk Factors: The physical exam can reveal underlying health issues or risk factors that could impact an applicant's life expectancy. These factors include high cholesterol, diabetes, HIV/AIDS, nicotine or drug use, and liver or kidney disease. By identifying these factors, insurers can make informed decisions about coverage and encourage applicants to address these issues proactively.
• Customized Coverage: The results of the physical exam enable insurers to offer customized coverage options that align with an applicant's specific health status. This ensures that individuals receive the most suitable protection for their needs, providing peace of mind and comprehensive financial security for their loved ones.
• Long-Term Savings: While a physical exam may seem like a short-term inconvenience, it can have long-term financial benefits. Applicants who are found to be in good health may secure lower premiums, resulting in substantial savings over the life of the policy. Additionally, addressing any underlying health issues can improve overall wellness and potentially reduce future medical expenses.
• Peace of Mind: Undergoing a physical exam as part of the life insurance application process provides applicants with peace of mind, knowing that their health has been thoroughly assessed. This knowledge can reduce anxiety and uncertainty about their insurability and help them make informed decisions regarding their financial planning and overall well-being.

What are the tax implications?

The Internal Revenue Service (IRS) treats life insurance differently from other financial products because it is intended to support one's beneficiaries. The IRS imposes different tax rules on different plans, and sometimes the distinctions are arbitrary.

• Under most circumstances, you don't pay a sales tax on life insurance premiums. However, states typically charge insurers a tax on the premiums they collect, which is likely passed on to the consumer.
• You cannot deduct life insurance premiums from your income taxes. Life insurance premiums—which are classified as a personal expense by the IRS—cannot be deducted on your federal tax return.
• If your employer pays for your life insurance, the premium paid on policy amounts above $50,000 is considered part of your taxable income. When an employer provides life insurance as part of an overall compensation package, the IRS considers it income, which means the employee is subject to taxes.
• Interest generated from whole life insurance policies is not taxed until the policy is cashed out. Whole life insurance plans accumulate cash value as policyholders pay into the plans with their premium dollars. A portion of the premium dollars enters a fund that accumulates interest. This interest is considered income to the policyholder and has income tax implications.
• Life insurance proceeds you receive as a beneficiary are generally not included in your income and do not need to be reported to the IRS. However, life insurance proceeds are taxable when included as part of your estate and if you meet the $12.9 million filing threshold.
• Withdrawals from permanent life insurance are not taxed if they are within the value of the premiums you paid. Cash-value life insurance has certain tax advantages. One of them is that withdrawals made from the policy are considered a return of premiums already paid and are therefore not subject to taxation. However, if you withdraw gains from interest or dividends, those dollars would be taxed as income.
• Life insurance premiums are not usually tax-deductible. However, you may be able to deduct them as a business expense if you are not directly or indirectly a beneficiary of the policy.

Frequently asked questions