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What is an Insurance Premium?

A premium is the amount you pay for an insurance policy. It can be paid on a regular basis (e.g., monthly or annually) or in one lump sum when you first purchase the policy. The insurance provider determines your premium during a process called underwriting.

Why premiums matter

When you buy any insurance product, you enter into a contract with the insurance provider. In order for them to hold up their end of the bargain, you need to hold up yours. That means paying your premium, or the amount you owe to maintain coverage, whenever it’s due.

The premium for your policy will usually be expressed as an annual premium or the cost for a year’s worth of coverage. But most life insurance companies offer a variety of premium payment options. You may be able to pay your premium once a year, once a quarter, twice a year, or monthly, for example.

Some insurance providers also offer single-premium policies, which means you pay the entire cost of the policy upfront when you buy it.

If you fail to pay your premiums as they’re due, your policy will lapse after a set grace period (usually about a month). At that point, your insurance provider can cancel coverage and deny any claim you try to file under the lapsed policy.

How insurance providers determine your premiums

The insurance company sets the premiums using a process called underwriting. That means they look into you and any relevant factors to determine how risky you are to insure. The bigger the risk they take on in insuring you, the more they will charge for your premiums. That’s their way of offsetting that risk in order to protect their business.

When it comes to life insurance, your riskiness is directly tied to your longevity. The longer you live to pay your premiums, the more money the insurance company can recoup from you before they have to pay out your death benefit to your beneficiaries. That means that healthier, younger people can expect lower premiums. Smokers, people with chronic health conditions, and older individuals will generally be charged more for their life insurance.

Beyond your individual risk factors, the amount of coverage you want also determines your premiums. A $500,000 life insurance policy will cost less than a $2 million one, for example.

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