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Your Life Insurance Premium – Explained

A life insurance premium is the amount you pay for the coverage stated in your life insurance policy. While it might be possible to make a lump sum payment, one that would pay off the premium, such a payment would go beyond the means of most people. Add the fact that it really wouldn’t make much sense for most of us to lay out that amount of money. The money could just as easily be invested, with the interest gained possibly sufficient to make the payments on the premium.

We usually use the word premium synonymously with the monthly or quarterly payment we make on a policy, i.e., “the cheque for this month’s premium is in the mail”. What we should say is – “a cheque for this month’s payment on the premium is in the mail”. That might seem to be splitting hairs, but as long as the insurance company gets the payment, it doesn’t matter.

A life insurance premium, the premium on most insurance policies for that matter, is based on statistics. You will be asked a number of questions when you apply for a life insurance policy. Unless you are seeking a guaranteed life policy, a number of the questions will be about your health and your lifestyle. If you are in poor health, the premium you have to pay on the policy will be higher. If you are a smoker, it will also be higher, as it will be higher the older you are.  Someone who is 25 years old, who has a good job, is in excellent health, and does not smoke will pay a far lower premium, for the same amount of coverage, than would a 40 year old man who smokes, is in poor health, and does not lead a healthy lifestyle.  Put another way, the premium you pay for a given amount of coverage is in proportion to the risk of your dying at an earlier than average age.

Your health and lifestyle are important, but it should be noted that the premium you pay is not calculated based strictly on the answers you give when applying. The premium is based on where you fit within the general population. If you fit in a higher-risk-of-dying-early segment of the population, you’ll pay more for your insurance. The premium you pay is based on risk and statistics, and not on you as an individual.

For some types of insurance, the premium, hence the monthly payments can vary with time. With automobile insurance for example, if you have several traffic violations or accidents within a specified time period, your premium can go up, sometimes significantly. With life insurance policies however, the payment does not change from one month to the next, and may never change. When you purchase a life insurance policy, always ask if the premium on the policy will ever change, and if so under what circumstances. If you have any questions about your life insurance premium and how it is determined, please ask.