I am often asked, “How much does life insurance cost?” and invariably, the answer is “It depends.” This essay will attempt to explain on what it depends and also provide some idea of what it does cost.
The premium you pay for life insurance is dependent on five factors; age, gender, face amount, how long the premiums are scheduled to be paid, and the likelihood that the company will pay a claim on the policy. Included in the last category is the health of the applicant, which would include smoking status.
Let’s look at the premiums for a 30 year-old male looking to procure $1,000,000 of coverage. We know the age, gender and face amount, so the only variables are the premium schedule and the likelihood that the policy will mature in a death claim. The range of annual premiums for this scenario is a low of $235 to a high of $78,610. What could possibly make for such a broad range of premiums? Again, it’s the premium schedule and the probability that the company will pay a claim on the policy.
The $235 premium is for an individual who receives the best underwriting classification for an annually renewable term policy whose premium increases every year, so that in year 10 the premium is $475 and in year 20 it is $5,265.
The $78,610 premium is for a smoker who receives the worst possible underwriting classification (any worse and the individual would be uninsurable) for a policy that only requires ten annual premiums.
Now obviously those are extreme cases. Let’s look at a more common example of a 20-year term policy (a term policy that has guaranteed level premiums for 20 years) and a 20 pay whole life policy (a policy that only requires premiums for 20 years while maintaining coverage until death).
The same 30 year old male looking for $1,000,000 of coverage and in the second best underwriting class would pay annual premiums of $585 for the 20 year term policy and $21,390 for the 20 pay whole life policy? Why would someone pay $21,390 when they could get the same thing for $585?
First, and this is critically important, it’s not “the same thing.” The term policy’s level premiums end after 20 years. If coverage is still needed, the premium is $6,825 in year 21 and increases annually thereafter. If the individual is still insurable, a new 20-year term policy could be procured with and annual premium of about half that amount or less.
The 20 year whole life policy would be “paid up,” a technical term meaning that not only are no more premiums required, but no more premiums could be paid even if one wanted to. Additionally, at the current non-guaranteed dividend scale, the face amount would be just shy of $1.5 million and the cash value would be a tad over $600,000.
Secondly, the odds are slim that the insurance company would have to pay a claim on the term policy, as almost all 30 year-olds will live to age 50, but it will 100% have to pay a claim on the whole life policy, unless it is surrendered.
So I hope this short missive explains why “it depends.” It depends on one’s objectives and risk tolerance.
N.B. The premiums mentioned are from a single company. To look at all the premiums from all the companies I represent would have taken an inordinate amount of time while providing no additional clarity.
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