Life insurance can be confusing. The amount of jargon that makes up a life insurance policy could easily fill a dictionary. Luckily, if you’re working with an agent, you don’t need to know too much in order to answer the right questions. However, one word does manage to throw some life insurance buyers off. What do life insurance carriers mean when they talk about your “premium?”
In a nutshell, the premium on your policy is the amount of money that the carrier needs from you on a regular basis to keep your policy active. It’s the price you pay regularly to keep your coverage going.
For example, if you’re a 35-year-old male rated at best-class for a $500,000 policy, your monthly premium will be around $19.75, meaning you’ll pay $19.75 each month it’s active. If you shop for a policy with an annual premium instead, you’ll be paying around $235 per year. Any time you see the word “Premium” during a life insurance application, you’re actually talking about price.
Your “Mode” and “Modal Premium”
The “Mode” of your premium describes the payment plan that your policy uses. Basically, it’s what dictates when you make your recurring payments, and the amount of money each payment will run you.
Depending on your carrier, you have several payment plans to choose from. The most common ways to pay for a policy are Annual and Monthly payments. Some carriers also offer quarterly and semi-annual payment plans, but those are a bit less common.
The “Modal Premium” of a policy is the amount that you’ll have to pay each time you make a payment. The fewer payments you make, the larger each individual payment will be, but your long-term price will be more or less the same for a full year of coverage.
Annual payments mean that you’ll be paying for an entire year of coverage upfront. The upside of the large lump sum payment is that your price might actually be slightly lower over time because it costs the carrier less to process one payment than several over the course of the year.
Monthly premium payments, on the other hand, are smaller, but slightly more expensive in the long run. However, many carriers will offer the option of setting up automatic monthly payments so you don’t need to worry about forgetting to re-up your coverage.
But Wait, That’s Not How I Use “Premium!”
These days, the word premium means “excellent, above-average, or exceptional” pretty much anywhere outside of the finance world. Now, I know what you’re thinking – there’s nothing exceptional about spending money. However, the way we use premium to describe things like car washes that add deluxe triple-layer wax spray to the mix is actually a relatively new use of the word.
Originally, the word “Premium” came from the latin words prae – meaning “before,” and emere – which means “to take.” You can think of the phrase “prae emere” together as “took” or “was taken.” That phrase eventually got shortened to praemium, and soldiers used it to talk about the booty lifted from conquered towns and kingdoms.
Since soldiers saw their plunder as their “reward” for going to war, they started to use the word praemium to describe any reward received for an action that was taken in the past, which included things like prizes won in competitions. The financial meaning of the word begins to make a little more sense if you imagine banks and insurance carriers as warring countries or competing athletes vying for control over your money.
In an interesting twist, the “deluxe” meaning of premium came from items that won prizes in baking contests and county fairs. It’s similar to calling something a “Blue Ribbon” apple pie, or a “New York Times Bestselling” novel. Using the name of an award to heighten the value of a product is just an age-old advertising trick that’s integrated fully into our vocabulary.
Long story short, when an insurance carrier is talking about the premium on your policy, they’re really talking about your price. If you’re looking for a premium premium on a term life insurance policy, Quotacy can help. Just run a quick quote using our online tool and see how low your costs could be.
Photo (Painting) Credit to: Jean Froissart