At Quotacy it costs nothing to apply for life insurance. Even the costs of the medical exam and ordering doctor records are at no charge to you. Your costs come in when it’s time to pay your policy premiums. The cost of a life insurance policy varies depending upon the insured, the product, and the amount of coverage you choose.
There are several types of life insurance available the main ones being term life, whole life, and universal life insurance. 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.
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 may affect life insurance costs.
Term Life Insurance
Term life insurance is life insurance that provides coverage with a fixed price for a temporary period of years. After that period expires, coverage at the previous price is no longer guaranteed and 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. 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.
With term insurance you can choose to pay the premiums monthly, quarterly, semi-annually (twice a year) or annually. Similar to most payment plans, you can skim a couple dollars off the top if you opt to pay annually.
Whole Life Insurance
Whole life is a permanent type of insurance designed to provide coverage for your entire lifetime. Over time, a cash value balance is created within the policy that you can use when you find yourself in need of extra money. It is because of this cash value and the lifetime coverage that whole life insurance has higher premiums.
You have the option to borrow or withdraw your cash surrender value at any time.
- Borrowing – If you borrow from it, the insurance carrier treats it as a policy loan and you pay interest on the loan 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 – Some whole life policies pay dividends which can be used to purchase “paid-up additions”. In addition to death benefits, they then also have cash value surrender you can withdraw from income-tax free as long as the withdrawal amount is less than the total amount of premiums you have paid into the policy.
It is important to note that when you die your beneficiaries only receive the face amount plus any paid-up additions. If there is a cash value balance it is not added to the death benefit.
Jane Doe buys a $100,000 whole-life policy and dies with the cash value at $40,000 and no paid-up additions. 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, or 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 for 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
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.
- Withdrawal – This occurs if you decide to permanently withdraw a portion of your policy’s cash value, but keep some or all coverage in force. There is no interest charged for a partial withdrawal.
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 in force.
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.
Photo credit to: Anssi Koskinen