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Guide

Life insurance premiums explained

How are life insurance premiums calculated? Here’s everything you need to know about premiums, how they’re calculated and things to consider.

Understanding life insurance premiums will help you choose the right product for you. There are different kinds of premiums available. They will vary depending on your personal circumstances. In this guide, you’ll learn what a life insurance premium is and how it’s calculated. You’ll also find out about different kinds of life insurance. And we explore other important things to be aware of.

What is a life insurance premium?

'Premium' is the word that insurers use for payments. So, what is a life insurance premium then? It is essentially the amount you pay for the cover. If you stop paying the premium, you usually stop being insured. That would mean if you died, your loved ones wouldn't receive a payout. You normally pay the premium annually, quarterly, or monthly.

Think about life insurance premiums like a monthly pass to a video streaming website. If you keep paying, you can watch the movies. If you stop, you lose the benefits.

How to calculate life insurance premiums

If you’ve compared a few life insurance quotes, you’re probably wondering why each one is different. Life insurance is about risk. It might sound a little morbid, but life insurers are trying to figure out how likely you are to die. Each insurer uses their own data to calculate your level of risk. The way insurers calculate risk is unique to each company.

There are a few different factors that go into the calculation. First, there are personal factors. That’s things like your age, medical history, gender and occupation. If you’re older, or have a history of illness, it will push your premium up. If you start the policy when you’re young and healthy, it’ll cost less.

Then there’s the type of cover you want. You could choose term cover. That’s where you’re insured for a fixed number of years. Or there’s whole life insurance, where you get a payout whenever you die. Whole life insurance will cost more because the insurer will always have to pay at some point.

It also depends on how much cover you want or need. People with big debts, such as mortgages, would need a bigger payout if they died. So, the insurer will charge higher premiums. But if you’d paid your mortgage off, your loved ones wouldn’t need so much money to get by. This would make your premiums lower.

What is guaranteed premium life insurance?

A guaranteed premium life insurance policy is where your payments stay the same until the end of the policy term. If you got a guaranteed premium policy for 25 years with a premium of £40 a month, that amount would never change.

The alternative is a reviewable policy. This is where your premiums can go up (or down) after the first few years. The insurer will review your premiums each year and decide if you are now at a higher risk.

A guaranteed premium life insurance policy might cost more than a reviewable policy to begin with. But you will be able to budget, knowing exactly how much it’s going to cost each month.

Do life insurance premiums increase every year?

It depends on your policy. If you have a guaranteed premium life insurance policy, you’ll pay the exact same amount till the policy ends. But if you have a reviewable policy the insurer has the right to increase your annual premiums.

Usually, whole life insurance policies are reviewable. When you’re younger, they will usually go up roughly by 5-10% each year. As you get older, they can go up by 10% or more.

If you have a term life insurance policy, you can choose between a guaranteed premium or a reviewable policy. The reviewable policy will usually be less expensive to start. But, by the end, you could be paying a lot more each month.

What is premium protection on life insurance?

Premium protection on life insurance is when the insurer agrees to ‘waive’ your payments if you’re unable to pay for certain reasons. For example, you might be injured so can’t work for a few months. If you couldn’t afford to pay, your policy would normally be cancelled. But if you have premium protection, the insurer agrees to a ‘pause’ in payments till you return to work.

Premium protection will cost a little more each month. Usually it’s just a couple of pounds. But it gives you peace of mind that you will always be covered.

Premium protection only applies in certain situations. It usually only kicks in if you’re sick or injured. It won’t usually apply if you can’t pay after being made redundant. As ever, read the small print to check what’s covered.

Can someone else pay my life insurance premiums?

Yes and no.

Generally speaking, other people can’t pay your personal life insurance premiums. The one exception is insurance offered by your employer. Your company might have a ‘death in service’ benefit. If you died, the company’s insurer would pay out to your family.

You might know someone who is particularly generous and who wants to pay your premiums. That would be fine, but they would have to send you the money. You would then pay the premiums from your own bank account. They couldn’t be the policyholder themselves.

It is possible for someone else to take insurance out on you. This means they are the policy holder. They will get paid if you die. For someone else to take a life insurance policy out on you, they will need your consent. You’ll also need to undergo a medical check.

Insurance companies only accept this if there is an ‘insurable interest’. This means that the policyholder would lose out financially if you died. There are a handful of circumstances where this might happen.

One example is business partners. If you died, your business partner would stand to lose money. That means there is an insurable interest. The same goes if you owe someone money that you plan to repay. But, if you die, they wouldn’t receive their dues. People might also take insurance out on you if you have irreplaceable skills. For example, a celebrity’s agent might take life insurance out on them, because they’d lose money if the celebrity died.

Another is people who depend on you. That could be an ex-partner who relies on you for child support, or parents who rely on you for income.

There are often alternatives to taking life insurance out on someone else. For example, a joint life insurance policy shared between spouses is very common. It would often be easier (and cheaper) than each spouse taking out a separate policy on the other.

Relevant guides and articles 

  • Term life guide

    Thinking about life insurance? Find out everything you need to know about term life cover and whether it suits your needs in this guide.

  • Joint life insurance guide

    How is joint life insurance different to single cover? Find out the answer to this question and learn all about whether this is the best option for you and your partner.

  • Whole of life 

    Whole of life insurance guarantees a payout to your loved ones when you die. Find out how this cover can protect your family's financial security.