Life Insurance Cost

How Much Should Life Insurance Cost?

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Let's take a look at life insurance cost. Why would one life insurance policy cost more than another? Why do term policies cost less than whole life policies? The answers to these questions are so logical you will be amazed when you learn how it all works.

There are 3 things which determine how much you pay for life insurance. They are your age, your health and your occupation or avocation. It is quite understandable that someone in good health will likely pay less than someone that is in bad health.

It is also understandable that someone who engages in a hazardous occupation or avocation will likely pay more or will be declined by the life insurance company.

It should not be difficult therefore to appreciate that as a person gets older there is a greater chance that that person will die within a given period than a younger person.

Let us now see how this all applies to how premium costs are determined. Let us look at the yearly renewable term policy. This policy is in effect a one year term policy which you renew each year without evidence of insure-ability. You don't need to qualify all over each year to keep the policy.

Yearly renewable term is a level term policy but the premium increases every year. The same death benefit costs more each year simply because the insured gets older and as a result that person is more likely to die. This is considered life insurance in it's purest form. The initial premiums are extremely cheap.

People do not like the idea, however, that their premiums increase. The insurance companies are aware of this so they created alternatives. Let us look at the 10 year term policy as an example. It has a level death benefit for the entire 10 year period. The premiums are also level. They don't increase like the yearly renewable term policy.

What the life insurance companies have done here is to take total of the premium costs over the 10 year period and divide it by 10. You are therefore paying more than you should in the first year and less than you should pay in the tenth year. The actuaries make other adjustments but that is basically how it works for all level term policies.

That is why the longer the period you want the coverage for the higher the premium. You should also appreciate why whole life costs so much more than term. Whole life is insurance for the rest of your life or insurance to age 100. Can you conceive how prohibitive the premiums at ages 98 and 99 would be?

The companies do the same thing with whole life but because the period is so long they return the premium they overcharged you in previous years in the form of a guaranteed cash value, that is if you don't die. They pay a guaranteed interest rate on the cash value.

Can you see now why life insurance cost differs so much based on how long the coverage is for? Doesn't this all make sense?

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