How much does life insurance cost on average and how is that cost determined?

Considering getting a life insurance policy? It can be a valuable way to protect your loved ones financially. A lower premium, the amount of money you pay for an insurance policy, can save you money over time. However, understanding how and what goes into determining just how much premiums you will need to pay, can be confusing.

We’re here to demystify the process. Many factors contribute to the cost of life insurance policy – some you can’t control, but others you can. By learning what impacts your premiums before you get a life insurance policy quote, you can better understand your options when choosing what’s best for you and your family.

How policy impacts the cost of life insurance

Your contract with the life insurance company is called a policy, and there are several different kinds of insurance to choose from. The coverage amount you need (money received by your beneficiaries if you pass away) and how many years you need that coverage to last (term length) influence how much life insurance will cost.
 

What is covered by life insurance?

Life insurance covers most causes of death due to illness, accident, or natural causes, and will pay out a financial benefit to help protect your family. It will likely not pay out due to fraud and criminal activity. There are a few caveats:

  • While life insurance pays out for accidental deaths, you may also purchase accident insurance for additional coverage.
  • Your policy may include clauses that rejects claims if the policyholder dies within two years of the coverage’s start date and their death is ruled a suicide.
  • Life insurance will cover murder but will not pay out of the beneficiary intentionally caused the policyholder’s death.
     

Main types of life insurance 

There are two primary types — term or permanent.

  • One of the most common insurance policies is term life insurance, where the insurance protection lasts for a set period of time — most commonly 10 to 30 years. If the policy is not renewed after the term period is over, your protection will expire. Within term life, there are several varieties.

    Level premium means that your monthly payments won’t go up over time. Decreasing term means that the amount of money your beneficiaries would get if you pass away goes down over time, and annual renewal means that you may be able to continue past the original term, without a medical exam, but the renewal cost will likely rise each year once the term is over.1
     
  • The other type of insurance  is permanent life insurance, which includes whole life. Whole life insurance lasts for your entire life, provided your payments are up to date. The policy has an extra component called cash value, that builds up a significant, tax-advantaged asset – money that can be used during your lifetime. You could borrow against it, withdraw some as cash, purchase more life insurance coverage or eventually use it for retirement, while staying protected for life. Whole life insurance initially costs more than term life insurance as it provides insurance coverage for your entire lifetime, along with the other cash account benefits.*

How your age impacts cost

Younger people are further away from their potential life expectancy, so insurance rates reflect that. In other words, if you wait until your senior years to take out a policy, it will cost significantly more, assuming you can get the policy at all.

Why you’re not too young for life insurance

It’s potentially much better to buy life insurance earlier in life — especially when considering whole life (permanent) life insurance.2 Your physical exam may be easier to pass when you’re younger and the rates will be lower. If you lock in a whole life policy at an earlier age, your monthly premium (bills you pay for the insurance) will stay level, so that in the far future, they could seem like a bargain price for insurance that can’t be canceled.**

How your health affects life insurance pricing

Your health is one of the most important factors in determining your premiums. Certain risks like smoking or a family medical history of serious illnesses such as cancer or heart problems will impact your costs.3  

You may have to take a brief medical exam, answer questions about your health, and may even need to get a statement from your doctor as well (called an Attending Physician’s Statement, or APS).

What happens if you have a medical condition?

Pre-existing health conditions will impact cost. For some conditions like HIV, it’s still possible to get life insurance coverage from an insurance carrier.

How gender impacts cost

Due to a shorter life expectancy, men will generally pay more for life insurance than women, assuming they’re of the same age and health when they apply.
 

How your driving record impacts cost

If you have a problematic driving history, expect higher rates.
 

How your occupation affects pricing

Working in a dangerous job can raise rates. Examples might include firefighters, roofers, pilots, fishermen, loggers, or crane operators. The best advice for people in these occupations looking to lock in a competitive rate for life insurance is to research, shop around, and deal with known, reputable insurers.4
 

How your hobbies and activities impact cost

Hobbies such as skydiving, motorcycle racing, hang gliding, mountain climbing, hunting, and even recreational boating/fishing may up your costs.
 

The amount your loved ones would receive

One of the key factors to consider when buying life insurance is the amount of money your loved ones would get if you passed away. The larger the policy, the more your beneficiaries would receive and the more the protection will cost.

There may be a limit on how much the insurance company would allow for, based on your potential earnings. If the payment to your beneficiaries — known in the insurance business as the death benefit — far exceeds your earning power during the time your life insurance policy is in effect, the company may limit the coverage before any contracts are signed.

Insurance underwriters will look at all the information you provide them to determine the cost. It helps to have some life insurance facts before signing a contract. When shopping for the best policy, consider discussing your options with a knowledgeable financial professional. They can walk you through the choices and recommend a strong company. 

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