Whole life insurance premiums are paid to a life insurance company in exchange for a fixed amount upon the death of the insured person. Factors like age, sex, health, lifestyle, and costs affect the premium. The carrier determines the premium based on actuarial analysis of mortality statistics and lifestyle factors. The premium includes the cost of insurance, hazardous occupations, selling costs, administrative costs, and profit. The savings amount is invested and retained in the policy as cash value, which can be used as collateral or borrowed. The policy remains in force for the life of the insured as long as premiums are paid on time.
A whole life insurance premium is money paid to a life insurance company in exchange for the company’s promise to pay a fixed amount in accordance with the policyholder’s instructions, upon the death of the insured person. . Many factors affect the amount of the premium, the most important being the age, sex, health and lifestyle of the insured. Other factors include the costs involved in selling and maintaining the policy, as well as setting up the savings component of the policy, called cash value.
The insurance company or insurance company takes into account the age, sex, health and lifestyle of the insured when the insurance application is first submitted. Based on the information provided, which the carrier may choose to verify by referring the applicant to their own doctor for an examination, the carrier may have a very good idea of how long the applicant can be expected to live under normal circumstances. The carrier also knows, based on actuarial analysis of mortality statistics, how many people of the applicant’s age may die in the current year. It is the carrier’s obligation to honor the death benefit claims of that percentage of its insureds of the same age, sex, and lifestyle as the claimant that determine the premium charged for life insurance. Lifestyle problems may be particularly influential, with tobacco use especially considered an important factor in reducing life expectancy.
For example, if an insurer has 1,000 30-year-old non-smoking female insureds with an average $25,000 US dollar death benefit per policy, and the insurer’s actuarial analysis suggests that 10 of them, or 1%, will die in that year, the company knows that it will probably have to pay out about $250,000 in death benefits for that particular group of people. Therefore, just to meet the death benefit obligation, the carrier must collect a total of $250,000 annually from that pool, or $250 per person, or $10 per $1,000 of insurance. That is the fee, or “insurance cost,” that the carrier will charge a 30-year-old non-smoking female applicant. The cost of insurance increases annually, as the population ages; a group of 40-year-olds will have a higher mortality rate than a similar group of 30-year-olds.
However, other items besides the cost of insurance are included in a whole life insurance premium. Hazardous occupations, such as firefighting and law enforcement, as well as dangerous hobbies like skydiving or cross-country motorcycle racing, can have a dramatic impact on a whole life insurance premium, if the carrier even agrees to issue the policy. Selling costs are also included in a whole life insurance policy and can be significant. Some carriers pay their sales agents a commission of up to 110% of the first year’s premium for certain life insurance policies, although most commissions paid on the sale of whole life insurance are in the 40-percent range. % – 70% of the first year’s premium. Administrative costs are also included in a whole life insurance premium; things like office rents and compensation of administrative staff. The carrier also includes an amount in the premium as profit.
The other important component of a life insurance premium is the savings amount, which is an amount of money that is invested and retained in the policy as “cash value.” Over time, this can increase significantly, and whole life insurance is often promoted as an investment that policyholders can use to subsidize their retirement. Cash value is an asset that can be lent or used as collateral, subject to some restrictions imposed by the carrier. Retirees with whole life insurance policies can borrow their cash value or simply withdraw it. The death benefit paid will be reduced by any amount withdrawn, as well as any outstanding loans. However, since senior citizens don’t have the same life insurance needs as their younger counterparts, that’s not a disadvantage, according to life insurance advocates.
One attractive feature of a whole life insurance policy is that as long as premiums are paid on time, it will remain in force for the life of the insured and premiums will remain level. Because the cost of insurance can be expected to increase annually, the insurer maintains the whole life insurance premium level from year to year by reducing the amount of the premium payment that is contributed to the cash value by the same amount as the insurance cost increases.
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