How much does life insurance cost?

Life insurance premiums

One of the main things to think about when buying life insurance is the premium. This is the amount you'll pay for coverage.

And instead of taking on the financial outcomes of death by ourselves, we can transfer that risk to a life insurance company.

In exchange, we pay a periodic premium. This transfer of risk is the foundation of all insurance products, including auto or health insurance.

As you're considering life insurance costs, there are many things that affect your premium, including coverage type and amount, underwriting conditions such as age and health along with certain lifestyle choices, like risky hobbies.

Let's look at cost elements for the two main coverage types you can choose from.

Term life insurance premiums

This type of insurance covers needs that may lessen with age, while permanent life insurance lasts a lifetime. Think of things like mortgage payments, covering earned income, or your children's college tuition. In most cases, permanent life insurance is more expensive than term life insurance.

In fact, people often overestimate the cost of term coverage, according to a recent LIMRA study Opens in a New Window.‍ ‍ ^{See note 1} While the average cost is about $170 per year, most people surveyed expected a term life insurance policy to run $500 a year or more.

When reviewing the cost of a term life policy, you'll mainly look at the amount of coverage you're getting and the length of the term. It's usually straightforward. But you'll still want to pay special attention to the scheduled premium adjustments.

Most term life policies are level term. This means that the premium you pay is fixed for the length of the term selected. But some policies are annual renewable term. These policies can be renewed every year with a new premium. Typically, the premiums increase as you age, so make sure to watch out for rising costs.

Some annual renewable policies can last into your 70s, 80s or even until age 100. And because age is a factor, the cost of coverage can get quite expensive later in life.

Similarly, although level term provides set premiums for a specific duration, the coverage typically continues after the term ends. At that point, it usually turns into an annual renewable term that's paired with a fixed or decreasing death benefit.

Permanent life insurance premiums

There's a lot more to consider when assessing the cost of permanent life insurance.

The most common type of permanent life insurance is whole life insurance. But you can also get universal life insurance. Regardless of your choice, the monthly premium will likely be higher than term life because the coverage lasts longer. Also, most permanent life insurance policies have a cash value component.

That's why when you're looking at the cost of permanent insurance, you want to consider more than the premium. It's important to compare the relationship between the total premiums paid and the policy's total cash value.

Here's an example. Let's say a 35-year-old takes out a $50,000 whole life policy that costs $700 a year. She pays on the policy for 30 years. Then, when she's 65, she decides she doesn't need the coverage anymore. Over 30 years, she paid $21,000 in premiums.

That's not bad, considering her beneficiaries would have received $50,000 in the event of her death.

But, that's not all. During those 30 years, her policy's cash value was compounding. Here's how a reasonable estimate for cash value growth could look:

• At 5 years: $750
• At 10 years: $2,900
• At 20 years: $8,600
• At 30 years: $16,000

These numbers show that the net cost of the policy was actually $5,000, not considering factors like inflation. She paid $21,000 in premiums but gained $16,000 cash value. So, in the end, her policy only cost $166 a year.

In other words, if you decide to end a whole life policy, you won't be out all the money you paid in premiums. In some policies, the cash value is greater than all the paid premiums.

What other factors affect life insurance premiums?

When you get a life insurance quote, remember that it's just an estimate. Your actual premium is usually based on medical underwriting and a medical exam. Underwriting is the last step of the process. It's similar to when you qualify for a personal loan or get the final price for your auto coverage.

These are the main things underwriters look at to determine your final cost.

Age and gender

Generally, the younger we are, the less our coverage costs. And because women have a longer life expectancy, their rates are usually lower.

Health

Medical history also plays an important role in underwriting. Your medical history is gathered from your medical records. The medical screening includes information like height, weight and blood pressure.

There's also usually a blood draw and urinalysis to measure things like cholesterol levels, blood sugar and nicotine use.

Occupation and hobbies

Riskier occupations and hobbies can also affect premiums. For example, a police officer has a riskier occupation than an accountant. And someone who golfs for a hobby has less risk than someone who goes skydiving.

Now that you have a better understanding of what goes into the cost of life insurance, it's a good idea to think through your family's situation and decide what type and how much life insurance would be best for you. From there, you can compare rates.