How is the whole life insurance premium determined?


There are three basic elements to whole life insurance premiums: the policy expense cost, the mortality cost, and the cash value. These three elements play an important part in determining whole life insurance premium rates in the process of underwriting.

The Policy Expense Costs

This is your share of insurance company's expenses, including underwriting, medical exams, management fees and agent commissions. Although the policy expense costs tend to remain constant, they are very high for whole life insurance policies, when compared to other types of policies. These are usually deducted from the cash value in the early years of the policy.

Mortality Cost

This very important constituent of whole life insurance premiums to a very large extent determines the individual premium rates. It calculates the applicants' odds of dying at the moment of application. Factors such as age, sex, use of tobacco and tobacco-related products, weight and height, lifestyle and geographical position, contribute to determining your mortality cost. Although mortality costs increase as people age, whole life insurance underwriters average the increasing mortality changes over the applicants' remaining expected life, by using actuarial statistics. The result is a level premium rate that remains constant. The peculiarity of whole life insurance is that once determined, premium rates cannot be changed - they remain fixed for life.

Cash Value

This is the most discussed and controversial element of whole life insurance policies. Here is how it works:

  • You overpay in the very first years when your mortality cost is lower, so that you can underpay in the later years of the policy when your mortality cost is going to be higher due to old age and deteriorating health.
  • The amount that you overpay in the early years is set aside for you in a reserve, called cash value.
  • You can benefit the most from the cash value if you have owned the whole life policy for at least 15 years, as the rate of return in the early years is very poor.
  • The cash value is not taxable unless you withdraw it, whereupon you pay tax only on the interest.
  • The hefty whole life insurance policy expense costs are typically deducted from the cash value.
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