Whole Life Insurance Rate

Explanation Of Whole Life Premiums

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Why would a whole life insurance rate be so much higher than that of term life insurance? Let us take a few minutes to see how whole life rates are determined. Is there a legitimate reason for the higher cost?

Perhaps the best way to discuss this is to look at how life insurance premium rates are determined in general. Let us start with the yearly renewable term policy. This policy is, in fact, a one year term policy which you renew each year without evidence of insure-ability.

Because life insurance costs more as you get older the premium for the yearly renewable term policy increases each year. The death benefit remains level for the duration of the policy.

What starts out as the cheapest coverage ends up being the most costly policy as time passes, that is if you keep this policy for a long time.

With that understanding let us now look at other level life insurance policies. The 5 year, 10 year, 15 year, 20 year, 25 year and 30 year level term policies each have level death benefits for the duration and level premiums.

The longer the term period the more the policies cost. 10 year term will cost more than 5 year term insurance. A 15 year term policy will cost less than a 20 year term policy, and so on. How do life insurance companies keep the premiums of these term policies level.

What they do is to assume the yearly renewable term is kept for say 10 years. Instead of charging the low premiums in the initial years the companies add up the premiums over the 10 year period and divide it by 10. You therefore end up paying more in the first few years than you should and less in the last few years than you should.

The same principle is used to determine all level term insurance premiums. In fact the same idea is used to determine the whole life premium rates. Whole life insurance costs more than term policies because it covers you until age 100. You therefore have a much higher premium than term policies.

Because whole life policies last so long the life insurance companies build into the policy what is known as a cash value. It is guaranteed and the interest rate is also guaranteed.

The whole life insurance rate is, therefore, higher than term life rates simply because you can keep your policy up until age 100. The life insurance company is at risk for a longer period of time.

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