How much will it cost? It’s a sensible question from any consumer for any product. In the case of a life insurance policy, the answers are “it depends” and “probably less than you think.”
The “it depends” part relates to the type of life insurance involved and your personal circumstances. The “less than you think” element is based on industry research over the years that consistently shows most people overestimate the cost of insurance.
Overestimation: Guessing wrong
For example, in a 2020 survey by LIMRA, respondents were asked to estimate the cost of a $250,000 20-year term life insurance policy for a healthy 30-year-old male.
- More than half of the respondents said $500 per year or more.
- The average cost of such a policy is closer to $160 per year.
“The perception of high cost has not shifted over the years,” LIMRA commented when it released the findings. It has conducted its annual survey for more than a decade.1
Additionally, the research indicates that the younger you are, the more likely you are to overestimate the cost.
Cost factors: Type of insurance
Different types of life insurance involve different levels of cost.
Term life insurance is the least expensive. That’s because it only provides basic insurance coverage for a set number of years – the “term.” The most common term policies are for 10 or 20 years, but terms of as little as five years and up to 30 years are also available.
Whole life insurance tends to be at the other end of the price spectrum. That’s because it offers more in regard to protection and financial growth, assuming premium obligations are met.
Whole life insurance provides:
- Guaranteed lifetime protection. Lifetime protection can help protect loved ones or achieve legacy goals well beyond the specific, set periods prescribed by term insurance.
- Tax-deferred cash value accumulation. Cash value in a policy grows on a tax-deferred basis at a rate guaranteed by the carrier.
- The ability to borrow from cash value. This can provide a reserve source of funds for things like college tuition or supplemental retirement income.2
- The opportunity to earn dividends. Dividends can help build cash value, increase insurance protection, or help reduce out-of-pocket costs for a policy.3
Other types of permanent insurance typically range in cost between term and whole life insurance, although there can be exceptions. These include:
- Universal life insurance. This kind of life insurance offers a flexible premium, allowing you to adjust the amount you pay as long as you have enough account value. (Learn more)
- Variable universal life insurance. In addition to flexible premiums, this kind of life insurance has access to different investment options for your cash value. (Learn more)
- Indexed universal life insurance. A kind of universal life insurance where credited interest can be correlated, with some caveats, to various market indexes. (Learn more)
- Group universal or group term life insurance. These are the kinds of life insurance typically offered by employers in benefit plans. They can fall short of individual needs and come with limitations. (Learn more)
Individual cost factors
How much any type of insurance will cost you depends on your risk profile, which is primarily determined by your age and health. Generally, the younger you are and the better your health, the lower your cost. Gender is also a factor. Because women outlive men on average, life insurance for a female is typically lower. (Calculator: How much life insurance do I need?)
So, how do these considerations play out in premiums?
Let’s look at a hypothetical example of term insurance — the least expensive kind of life insurance.
- The cost for a 25-year-old female nonsmoker in excellent health for a 20-year term policy for $100,000 would typically be about $111 per year.
- The cost for a 55-year-old female nonsmoker in excellent health for a 20-year term policy for $100,000 would typically be about $336 per year.
What about life insurance that’s more expensive because it lasts a lifetime and offers more features?
Let’s look at hypothetical projected costs for a $100,000 whole life insurance policy where premiums would be paid until the insured reaches age 100.
- The cost for a 25-year-old female nonsmoker in excellent health for such a whole life insurance policy would be about $767 per year.
- The costs for a 55-year-old female nonsmoker in excellent health for such a whole life insurance policy would be about $2,552 per year.
But remember, whole life insurance is permanent coverage and builds up cash value over time. The amount of cash value depends on the amount of the whole life policy you buy, how much has been paid in premiums at any given point, and the growth rate guaranteed by the carrier. Additionally, dividends can be used to increase both the amount of life insurance the policy provides and the cash value. Policies with fewer, larger premiums tend to build up cash value more quickly than policies with many smaller payments. (Related: What premium plan will work for you?)
In these whole life examples, the 25-year-old will have $13,000 or more in guaranteed cash value built up after 20 years. The 55-year-old, who would be paying more in premiums on a more constrained time frame, will amass more than three times that amount in 20 years. (A MassMutual financial professional can provide you with a specific look at the costs for your situation. You can find one here or let us know to have one contact you)
Other life insurance cost factors
Of course, other factors can come into play that would affect the cost of a life insurance policy, regardless of type.
For instance, the amount of the death benefit will change the amount needed in premiums. And the addition of any riders — provisions added to a policy that provide specific benefits or contingencies — can change the cost as well.
Also, occupation or lifestyle can be a factor. Smoking, which has been proven to adversely affect mortality, will increase life insurance costs. And high-risk jobs can be a challenge as well. The Apollo 11 astronauts, for example, couldn’t even get life insurance and had to resort to other means to ensure that their families would get some support if their mission went awry.
In the end, the cost of life insurance can vary widely, as a number of factors can come into play. More often than not, however, it is less than you may think. And given the protection and security it offers, plus the possible financial benefits available with some types, it can often be a meaningful asset in a family’s finances.
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1 LIMRA, “2020 Insurance Barometer Study,” June 2, 2020.
2 Tapping into the cash value of a life insurance policy reduces its value and death benefit and increases the chance the policy will lapse. If a policy lapses with an outstanding loan in excess of the cost basis, it’s taxable.
3 Dividends aren’t guaranteed. The amount of the dividend and the dividend payout itself are subject to change, depending on the operating performance experience of the insurance carrier in a given year. Dividends are primarily the result of favorable operating experience with respect to claims (death benefits paid), investment results, and expenses.