Whether you’re just getting life insurance or have spent years paying your premiums, you might start looking at your monthly payment. “Why is my insurance premium so high?” or “Has my life insurance premium increased?”
You may also wonder if you want to continue paying your life insurance premiums. Is that monthly payment still worth it? Should you let your policy lapse?
Let’s look at what determines your monthly premium.
To a life insurance company, it’s simple. As the person ages, ‘life expectancy’ decreases. This is why older people will pay higher premiums. Age is likely the biggest factor influencing your premium.
When you apply for term life insurance, you may be given a premium that will stay the same for the entire term. Then, when the predetermined term is over your premium on the plan will increase if you want to continue coverage. This is why many people get life insurance while they are young and healthy.
Here’s an example from Fidelity Life Insurance:
A healthy 30-year-old male can get a 30-year, $250,000 term policy for $29 a month.
While a healthy 40-year-old male would pay more than $42 a month for the same policy.
That’s a significant increase based entirely on age.
Many insurance companies require a medical exam before they give you a policy. They’ll also want to review your medical records to get a good sense of your health. Some medical conditions can put you in a less favorable rate class, resulting in higher premiums
Factors that put you at increased risk of medical conditions in the future will also increase your premiums. For example, weight, cholesterol, and high blood pressure. They may look at your family’s medical history to see if there are any hereditary diseases that run in the family.
Smoking increases a person’s risk of disease. So, a nonsmoker status will decrease life insurance premiums. A year after you quit smoking, your insurance company may change your status to nonsmoker, giving you a lower premium.
Life insurance companies don’t admire your love of skydiving and rock climbing. So, your hobby might cost you an increase in premiums. Some careers are considered high risk as well. Each insurance company may have different hobbies and careers that fall into the high-risk category.
When you first purchase life insurance, you have a choice between universal life, whole life, and a term life insurance policy.
Universal life insurance has flexible premiums. This means that if you have sufficient cash value accumulated in the policy, you may be able to skip a premium payment. The monthly policy charges would be deducted from the cash value for that month.
Universal life insurance policies are permanent policies meaning they can stay active for your entire life. That is, as long as you continue paying the premiums. With these policies, your premiums are accumulating cash value in the policy.
Part of your premiums for universal insurance policies go into an investment account if you have variable universal life insurance. Otherwise, premiums go into a fixed rate account. Here they can accumulate interest. How much cash value your policy accumulates is affected by the interest rates. Interest rates vary by insurance carrier and product line. Universal policies are less of a guarantee than whole life insurance policies. You don’t have a promised cash value and numbers can fluctuate.
This flexibility and cash value accumulation make these policies attractive. However, premiums for universal life insurance are higher than term life insurance. But possibly less than whole life insurance.
The premiums for a whole life insurance policy can stay the same for your whole life, but not always. Premiums can change depending on the dividend option chosen. The dividends your company offers can be used to lower premiums or buy additional insurance.
Whole life insurance policies have a consistent death benefit. However, they also accumulate cash value the way a universal policy does. Some people even choose to take loans out on their permanent policies. For these reasons, premiums are higher than term life insurance policies.
Term life insurance policies are in force for a set amount of time. Once the term is up, the premiums will increase significantly if you want to continue the life insurance policy. These policies are popular due to their low affordable premiums. When you purchase a term life insurance policy, you have these options:
Having certain riders added to your policy will also increase your premium. Riders are extra benefits added to a policy. Thus giving the insured more options for what they can do with their policy.
After paying for life insurance for many years, you may find that you don’t need it the way you used to. Dependents may have grown and become independent. Your health and financial situation may have changed. Instead of letting your policy lapse, you could sell it in a life settlement.
This is where someone else takes over your life insurance premiums and they receive the death benefit when you die. You receive a lump sum all at once when the policy is sold. Many people have used a life settlement to help pay for retirement or medical treatments.
There are a lot of factors that determine if your policy qualifies for a life settlement and how much your policy is worth. If you are at least 70 years old or living with a health impairment it’s likely you will qualify. Using a life settlement calculator will give you a general idea of how much your policy is worth. A life insurance broker will help you receive the highest bid for your policy.
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