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How is a Whole Life Insurance Premium Calculated?

By Dale Marshall
Updated: Feb 29, 2024

A whole life insurance premium is the money paid to a life insurance company in exchange for the company’s promise to pay a set 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 of which are the age, gender, health and lifestyle of the insured. Other factors include the costs involved in selling and maintaining the policy, as well as establishing the savings component of the policy, called the cash value.

The age, gender, health and lifestyle of the insured are taken into account by the insurance company, or carrier, when the application for insurance is first submitted. Based on the information provided, which the carrier may choose to verify by sending the applicant to its own doctor for an exam, 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 the applicant’s age can be expected to die in the current year. It is the carrier’s obligation to meet the death benefit claims of that percentage of its policyholders the same age, gender and lifestyle as the applicant that determine the premium charged for life insurance. Lifestyle issues can be particularly influential, with tobacco use especially being considered a major factor in reduced life expectancy.

For example, if a carrier has 1,000 female, non-smoking policyholders age 30, with an average of $25,000 US Dollars (USD) death benefit per policy, and the carrier’s actuarial analysis suggests that 10 of them, or 1%, will die in that year, the company knows it’s probably going to have to pay out about $250,000 USD in death benefits for that particular group of people. Thus, just to meet the death benefit obligation, the carrier must collect a total of $250,000 USD annually from that group, or $250 USD per person — or $10 USD per $1000 USD of insurance. That’s the rate, or "cost of insurance," 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 people age 40 will have a higher mortality rate than a similar group of people age 30.

Other items besides the cost of insurance are included in a whole life insurance premium, though. 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. Sales 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 for whole life insurance sales are in the range of 40% - 70% of the first year’s premium. Administrative costs are included in a whole life insurance premium as well; things like office rents and administrative staff compensation. The carrier also includes an amount in the premium as profit.

The other major component of a whole life insurance premium is the savings amount, which is an amount of money that’s invested and retained in the policy as “cash value.” Over time, this can grow to a significant amount, 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 borrowed against or used as collateral, subject to some restrictions imposed by the carrier. Retired people with whole life insurance policies can borrow from their cash value or just draw it down. The death benefit paid will be decreased by any amounts drawn down, as well as by any outstanding loans. Since senior citizens haven’t got the same life insurance needs as their younger counterparts, however, that’s not a disadvantage, according to whole life insurance proponents.

An attractive feature of a whole life insurance policy is that as long as the premiums are paid on time, it remains in force for the life of the insured, and the premiums remain level. Since the cost of insurance can be expected to increase annually, the carrier keeps the whole life insurance premium level year after year by reducing the amount of the premium payment that’s contributed to the cash value by the same amount that the cost of insurance increases.

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