There are several types of life insurance available the main ones being term life, whole life, and universal life insurance. The costs of each vary depending upon the individual, the product, and the amount of coverage you choose.
Everyone’s situation is unique so a policy that works for some may not be the best choice for another. Two people with the same type of policy may also pay different rates depending upon the individual’s age, health, and lifestyle. Let’s dig into how much life insurance costs.
5 Factors that Affect Life Insurance Costs
- Age – The younger you are, the cheaper life insurance is because you most likely won’t be dying soon. If you are 70 years old and looking to get life insurance, the insurance carriers see that as a high risk so you pay more.
- Health – Your height and weight, and smoking status, as well as chronic conditions such as diabetes, cancer, heart disease, and asthma all affect the cost.
- Gender – Women statistically live longer which means they would be paying premiums longer so life insurance costs tend to be cheaper.
- Family History – Your health could be clean as a whistle, but if your entire immediate family was diagnosed with heart disease at age 50 then you most likely will be paying more. The insurance carrier considers the risk that you too may develop heart disease.
- Hobbies – Scuba diving, skydiving, private aviation, world travel, any recreational activities that could be considered risky affect life insurance costs.
Whole Life Insurance Cost
Whole life is a permanent insurance product designed to provide coverage for your entire lifetime. Over time, a cash value balance is created within the policy. Because of cash value and the lifetime coverage, whole life insurance has higher premiums.
A portion of your premium payment goes to pay for the actual life insurance coverage which is an amount equal to the face value of the policy. The remains are put in a high-interest conservative account. The cash value builds from investments made by the insurance company.
You have the option to borrow or withdraw your cash value at any time.
- Borrowing – If you borrow from it, the insurance carrier treats it as a policy loan and you pay interest until it is repaid. If you die before it is repaid, the carrier will reduce the death benefit your beneficiaries receive by that unpaid amount.
- Withdrawing – If you withdraw from it, you will owe income taxes if the amount you withdraw is more than what you have paid in premium payments. Otherwise it’s tax-free.
It is important to note that when you die your beneficiaries only receive the face amount. If there is a cash value balance it is not added to the death benefit.
Someone buys a $100,000 whole-life policy and dies with the cash value at $40,000. The insurance carrier pays the beneficiary $100,000 not $140,000.
If you want to purchase a whole life policy, you have three different payment options:
- Single premium payment
- Premiums payable to 100 years
- Premiums payable for a limited number of years
Single Premium Payment – you make a one-time payment.
You’re 30 years old and pay $17,239 upfront for $100,000 of coverage, in addition to the cash value that can be accessed during your lifetime.
Premiums Payable to 100 Years – you pay a fixed monthly or annual payment to age 100.
You’re 30 years old and pay $80 a month or $900 annually for $100,000 of coverage until you die. Cash-value accumulates as well and can be accessed during your lifetime.
Limited Pay – premiums made for 10, 15, or 20 years to pay off the policy.
You’re 30 years old and want to pay off the policy in 15 years. You pay $113 monthly or $1300 annually for 15 years for $100,000 in coverage and never pay a premium again. Cash value still accumulates and can be accessed during your lifetime.
Universal Life Insurance Cost
Universal life (UL) insurance is one of the most versatile types of permanent life insurance. It has a high degree of flexibility and an “unbundled” nature by its separate expense, protection, and cash value elements.
- Premiums – Instead of being locked into a fixed premium schedule for life, you can potentially pay any amount between the required plan “minimum” to the IRS-imposed “maximum”, depending on your cash flow needs and accumulation goals. Premiums may be increased, decreased, or even skipped depending on policy conditions.
- Death Benefit – You can adjust the amount your beneficiaries receive upon your death within plan limits without having to buy a new, separate policy. This can reduce costs and simplify the process.
The premiums you pay each month go into a metaphorical bucket. Each month the insurance carrier takes out the administrative fees and the cost of insurance. The funds that are leftover earn interest. The amount of interest earned depends on the rate declared by the insurance carrier and how much money is currently in the bucket. The rate will never fall below a contractually guaranteed minimum. The cash value you accumulate can be accessed at any time through policy loans or surrenders.
- Policy loan – This enables you to “borrow” money from your policy using the value as a form of collateral. These loans do accrue interest and if not paid off while you’re alive, the unpaid amount is deducted from the death claim benefits.
- Full surrender – If you decide to fully surrender your policy, you are terminating all coverage and typically you receive any accumulated policy value, less a surrender charge and (if applicable) any accrued loan interest.
- Partial surrender – This occurs if you decide to permanently withdraw a portion of your policy’s cash value, but keep some or all coverage inforce. There is no interest charged for a partial surrender, but there is a flat fee.
With UL policies, you typically have two coverage options.
- Option A – Your amount of life insurance coverage (the death benefit your beneficiaries receive) stays level and as the cash value accumulates, the amount of life insurance you pay for decreases.
- Option B – The cash value is added to the initial amount of life insurance, extending your coverage as the cash balance grows.
You choose the amount of protection best for your situation. As a policyowner, you have more flexibility with a UL permanent product than whole life, but you also assume additional risk. UL policies typically have fewer guarantees than whole life coverage, so you must be careful to manage your premium payments and any distributions taken to ensure your policy stays inforce.
While a UL insurance policy is less expensive than whole life, it is still not the cheapest form of life insurance.
Term Life Insurance Cost
Term insurance is typically the most affordable option due to its temporary nature, and by far the most commonly owned life insurance product. There is no cash value inside a term insurance policy but the insurance company guarantees they will not increase the price you pay during this level term period (10, 15, 20, 25, or 30 years) to protect your loved ones.
John Doe can buy a $500,000 20-year level term insurance policy at $40 per month. If he dies unexpectedly any time within those 20 years, his beneficiaries will receive $500,000. If he died in the 10th year, he would have paid $4800 in premiums with his loved ones receiving $500,000.
If you should die within the term, the entire coverage amount goes to your beneficiaries. When your term ends, coverage at the previous price is no longer guaranteed. You must either forgo coverage, convert to a permanent policy if available, or potentially obtain a new policy with a different price by going through the underwriting process again.
Term insurance is typically the most affordable option due to its temporary nature, and by far the most commonly owned life insurance product.
A clause is written into most term insurance contracts that allows you to convert your policy to a permanent one. Term is ideal for those who need coverage for a specific period of time, but if your situation changes and you prefer coverage for your lifetime converting is an option.
You purchase a 20-year term policy with a 10-year conversion clause. This means if you are nine years into your contract and want to convert, you are free to do so without having to go through additional physical exams and would be able to obtain the same coverage at a lower premium than that of a completely new policy.
Return of Premium Term Life Insurance Cost
Return of premium term life insurance (ROP) is a term insurance policy in which the insurance carrier returns all the premiums you paid if you outlive the term length. Your beneficiaries still receive the death benefit should you die during the term.
Your monthly or annual premiums are fixed and do not change as you get older or if your health changes. ROP premiums are higher than traditional term because the insurance carrier is paying out whether you live or die, pending you pay your premiums keeping the policy inforce.
You’re 30 years old and purchase a 30-year ROP policy. You will pay $35 monthly or $390 annually for $100,000 worth of coverage. Should you die at age 40, your beneficiaries receive the $100,000 death benefit. Should the 30-year term policy end and you are still living, the insurance carrier gives you back the entire premium amount you paid tax-free ($12,600 if you paid monthly, $11,700 if you paid annually.)
There are many factors to consider when shopping for life insurance. The amount and type of life insurance you need depends on factors such as income, your dependents, debt, lifestyle, and how much risk you are willing to take.
We have covered here the main types of life insurance to give you an idea on the costs, but this list is not exhaustive. Life insurance is a very personal decision and should be determined thoughtfully. No one ever anticipates needing to use life insurance, but the unexpected happens.
Find out for yourself how much life insurance would cost you. At Quotacy you can run as many term life insurance quotes as you would like without even entering any personal contact information. We make the process easy and you have complete control over it without alerting some pushy salesperson. Be prepared with life insurance.
About the writer
Marketing Content and Social Media Manager
Natasha is a content manager and editor for Quotacy. She has worked in the life insurance industry since 2010, and making life insurance easier to understand with her writing since 2014. When not at work, you can find her throwing a tennis ball for her pit bull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on. Connect with her on LinkedIn.