In any conversation about insurance—whether it’s life insurance or homeowner insurance, car insurance, etc.—the term “premium” is likely to come up. In insurance-speak, premiums are simply the price you pay your insurance provider for your coverage. Depending on the type of coverage and your specific policy’s options, premiums are typically paid monthly, quarterly or annually, and they must be paid for your insurance to remain in effect.

How are premiums determined?

Premiums for life insurance vary from person to person and by how much coverage you need. As in car insurance—where a speedy sports car is going to cost more to insure than a basic sedan—life insurance premiums are calculated on a variety of factors that determine your overall “risk” to the insurer. The “death benefit” that’s paid to your beneficiaries if you die while you’re covered is paid regardless of how long you’ve held the policy, so insurers may offer lower rates to customers they assume will be paying premiums—and not passing away—for a long time.



Life insurance provides important financial protection for your loved ones, so it’s important to understand what you’re paying for.


To make these calculations, life insurers consider these factors when pricing your coverage:

  • Age: Applying for life insurance at a younger age will typically result in lower premiums, as your assumed life expectancy is longer and there is less risk of an early death to the insurer.
  • Gender: Women have a longer life expectancy than men, so they typically will pay lower premiums for life insurance coverage.
  • Health: Life insurance carriers often require a medical exam to ensure that your application is accurate and you don’t have preexisting conditions that could affect your life expectancy. A preexisting condition won’t always prevent you from getting coverage, but you may pay more.
  • Lifestyle: Smoking is a key health consideration that affects life insurance premiums, but other choices such as dangerous careers or hobbies also play a role. If you’re a test pilot or hang glider, for example, assume your premiums will be higher.

For more about what goes into premium pricing, read Life Insurance Decoded: How Health and Other Factors Affect your Pricing.

How do insurance carriers use premium payments?

Life insurers carefully price their coverage because, while the average life expectancy for all customers can be estimated, no one can predict if an individual customer will live to their expected age. Accidents and illnesses can happen to anyone, and the insurer may have to pay a death benefit earlier than expected.

Typically, when premiums are collected by a carrier, a portion is allocated to a reserve to help pay for current claims, a portion is invested by the carrier to help grow the company and its reserves, and a portion is used to pay for the normal expenses of running a business. Together, these allocations help ensure that the carrier will be able to pay death benefit claims when they’re needed—whether it’s sooner than expected or far in the future.

Talk to a professional

Life insurance provides important financial protection for your loved ones, so it’s important to understand what you’re paying for. An insurance or financial professional can work with you to determine the amount of coverage that meets your needs and the premiums that fit your budget.

Additional reading:

Is life insurance right for me?

Five myths about life insurance costs and coverage

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