Fidelity Life: How Term Life Insurance Premiums Work

Term life insurance can provide financial protection to a policyholder's family. If the policyholder passes away, the beneficiaries can receive a death benefit they can use to replace the policyholder's income, pay off debts, and cover other expenses.

In exchange, policyholders must pay monthly premiums to the insurer to maintain coverage. These can vary based on many factors, such as age and medical history. This article will help policyholders learn more and find a term life insurance quote that works for them by diving into how term life insurance premiums work, how they're calculated, and what the insurer does with premiums.

How do term life insurance premiums work?

When a policyholder takes out a term life insurance policy, they pay a fixed amount the day the policy starts. That's their first premium. After, policyholders pay the same amount each month to maintain coverage. Some insurers also accept annual or quarterly premium payments. The policyholder must continue to pay premiums, or the insurer will cancel the policy.

If the policyholder dies during the policy term, the insurer will pay out a death benefit to their loved ones. Otherwise, when the policy term ends, the coverage ends as well, and the policyholder stops paying premiums. 

How are term life insurance costs calculated?

Many factors go into calculating term life insurance premiums:

  • Insurer: Each insurer may offer different rates for the same coverage.
  • Coverage amount: The more coverage a policyholder gets, the higher the premiums.
  • Policy term length: Longer policy terms tend to be more expensive because health can decline with age, so the policyholder is more likely to pass away while the policy is in force. 
  • Riders: Riders are add-ons that can provide extra benefits. These may increase policy premiums.
  • Age: Premiums tend to increase with age. This is because older individuals tend to have a lower life expectancy than younger adults.
  • Gender: Men tend to pay higher premiums than women because they have a shorter life expectancy. 
  • Health: Health conditions or a family history of health problems can result in higher premiums.
  • Smoking: Smokers pay higher premiums than non-smokers.
  • Job: Some jobs, such as pilots and police officers, are considered riskier, so policyholders in these jobs pay higher premiums.
  • Hobbies: Some hobbies, such as skydiving and car racing, are deemed risky. Policyholders that engage in these activities often pay higher premiums.

What do insurers do with policyholder premiums?

Insurers use premiums to pay out death benefits to policyholders, surrender benefits, pay taxes, and cover other expenses. Many insurers will invest the premiums they receive into assets that generate returns. Most of these are "safe" assets, like bonds, but they also invest in mid-risk assets like stocks and mutual funds. Investing allows the insurer to generate additional income that can cover the costs of paying out claims and other expenses, also helping them offset costs and stay competitive with other insurers. 

How to get affordable term life insurance premiums

Here are some ways policyholders can get affordable term life insurance premiums:

  • Get a policy as soon as possible: The younger a policyholder is, the more likely they can qualify for lower term life insurance premiums. Getting term life insurance at a younger age can lock in affordable premiums that will last the duration of the policy.
  • Compare multiple quotes: Insurance companies offer different rates for the same coverage. Do some research and get several term life insurance quotes to find the best possible rate.
  • Only purchase necessary riders: When a policyholder buys term life insurance, they may have the option to add riders. Riders are policy add-ons that can provide additional benefits, but these can also increase premiums. So, policyholders should only buy the riders they need.

Finding the right term life insurance policy

Many factors affect term life insurance premiums. These are the three main takeaways:

  • Term life insurance premiums represent the cost policyholders pay to maintain their coverage. 
  • Insurers use these premiums to pay out death benefits when their policyholders file claims. 
  • Insurers invest much of their premiums into the markets to earn returns that can offset costs and help them stay competitive.

Various factors ultimately impact term life insurance premiums, but the best things policyholders can do is gather quotes from several insurers, get a policy as soon as possible, and only buy necessary riders. This will help them get the lowest possible premiums for the coverage they need.

For all media inquiries, contact: 

Laura Zimmerman, Chief Marketing Officer, (312) 288-0068

Source: Fidelity Life