A life insurance premium is a payment made to the life insurance company, to pay for a life insurance policy. Premium can also contribute to growing the cash value of a permanent type of life insurance. This term is also applied to payments remitted for annuity contracts both fixed and variable.
Premium payments are required to be made to the insurance company for a life insurance policy, otherwise, the policy will lapse. There are many ways that premium payments are structured depending upon the type of life insurance that it is paying towards. Premiums payments can be paid once, last for a few years, be flexible in timing and amount, or be level for the entire lifetime.
Premiums Due For Different Types of Life Insurance
Term Life Insurance Premiums
Term life insurance does not build cash value. Therefore, the premium payment made to the insurance company only covers the cost of insurance for the life insurance policy. The premiums for term life insurance are the lowest amongst all types of insurance policies for this reason. If a larger than required payment is made for a term life insurance policy the excess will normally be held in an account similar to an escrow account, and future premiums due will be drawn from this account.
Whole Life Insurance Premiums
Premium payments made for whole life insurance policies cover the cost of insurance just like with term insurance, but the premium payments are higher the same death benefit coverage. The reason the premium payments are higher is that whole life insurance is guaranteed to build cash value at a certain rate, as long as all premium payments are made in a timely manner. Premium payments above the amount detailed in the initial illustration can be made, but the excess is held in what amounts to an escrow account, which will pay a stated rate of interest. The excess payment does not go into the policy when the payment is made, but future premium payments will draw from the escrow account.
Universal And Variable Universal Life Insurance Premiums
Premium payments for universal life insurance and variable universal life insurance policies are flexible in nature, as long as the cost of insurance is covered by the premium payment or by the existing cash value within the policy. These policies tend to benefit clients the most when premium payments are made well in excess of the cost of insurance during the early years of the policy. This is because the excess premium payments create a large cash value reserve, which grows at either a guaranteed rate in the case of universal life insurance or at market returns in a variable universal life insurance policy.
Illustrated Premiums Vs. Minimum Premium Due
With whole life insurance, universal life insurance, and variable universal life insurance policies, sometimes a larger than needed premium payment is illustrated by a life insurance agent in the original illustration. This is because the intent of the policy is to build cash value at a faster rate for a higher internal rate of return, or because premium payments are meant to stop after a certain point, and sufficient cash value must be built up to end payments.
While you may be paying more than the minimum amount due to cover the cost of life insurance, this does not mean that your premium payments are being wasted, or are going into the insurance company’s pockets for no reason. Larger than needed premium payments may help you stop paying your insurance premiums earlier than otherwise needed, or may create a higher internal rate of return, or higher gross return in the policy for your benefit.
Sometimes illustrated rates of return are assumed, and a policy could perform better or worse than the illustration. This means that sometimes clients must make premium payments for longer or shorter than expected, and the rate of return in the policy may differ from the illustrated amount. An ethical insurance agent always illustrates life insurance policies using conservative assumptions, so it is likely the policy performs better than the client’s expectations.
Failure To Pay Required Premium
A failure to pay a premium payment when due will cause a life insurance policy to go into the grace period. This is the period of time after a missed premium payment when a policy has not lapsed but will if no payment is made. If no premium payment is remitted to the insurance company during the grace period, a life insurance policy will lapse and must be reinstated to resume coverage, if allowed.
If sufficient cash value exists in the policy, often times a missed premium payment will just reduce the cash surrender value by the amount of premium due. This means that premiums may sometimes be missed in policies with cash value. Term life insurance premiums must always be made by the due date, or the policy will promptly go into grace period status.
Limits To Amount of Premium Payments That Can Be Made
All forms of permanent life insurance have rules regulating the amount of money that can be paid into a policy. There are two separate limitations that the premium payments must adhere to for the contract to still be considered life insurance.
The first is the TAMRA 7 pay limit, which limits the amount of money that can be added to a life insurance policy during the first 7 years of a life insurance policies’ life. If these limits are violated, the policy will become a modified endowment contract (MEC). Modified endowment contracts are subject to different taxation rules than life insurance.
The second limitation that all life insurance must adhere to is the guideline premium limit. The guideline premium limit is calculated at issue and is based on the age of the insured, health rating, cost of insurance, and face value of the policy. A life insurance company can not legally accept more premium than the specified guideline limit and must return any excess to the payer. The guideline limit increases each policy year by the same value, called the annual guideline premium limit accrual amount.
How to Reduce Your Premium Payments
There are ways to reduce your premium payments, depending upon the type of policy that you have and want. Here are some of the best ways to lower your payments:
- Switch from permanent life insurance to term insurance, term is the lowest priced form of life insurance.
- Reduce your face amount. Most life insurance companies have no problem doing this and premiums will be reduced roughly proportionally.
- Compare quotes on new policies to see if you can lower your costs. Life insurance prices generally drop over time, but once your policy is issued premium payments are often level.
- Change dividend options on a whole life policy. You can direct dividends to offset premium payments. Eventually, the dividend may pay the entire premium.
There are other ways to lower premium amounts in addition to these, but they depend on the exact type of policy that you own. Please check with your life insurance agent for the best ways, given your specific situation.
Understand Your Premium Payment
At Life Ant, we always recommend that our clients fully understand their premium payments due, why they are the size that they are, and how this compares to the cost of insurance. A clear understanding must always be made as to how long premium payments need to be made, and the assumptions being made in this calculation.