What Is Premium?
The payment made to an insurance carrier on a regular basis to keep a life insurance policy active and in force.
Understanding Premium
A premium is the amount of money a policy owner pays to an insurance carrier to maintain life insurance coverage. Premiums can be paid monthly, quarterly, semi-annually, or annually, and the amount is determined at the time of policy issue based on factors such as the insured's age, health, gender, tobacco use, coverage amount, and policy type. Some policies offer level premiums that remain the same for the entire term or life of the policy, while others may have adjustable premiums that can change based on policy performance or carrier adjustments. Guaranteed premiums are backed by the financial strength and claims-paying ability of the issuing insurance carrier.
For term life insurance, premiums are typically level for a specified period (10, 15, 20, or 30 years), after which they increase significantly if the policy is renewed at annual renewable term rates based on the insured's attained age. Whole life insurance premiums are generally level for life and include a savings component that builds cash value over time on a tax-deferred basis. Universal life insurance offers flexible premiums, allowing the policy owner to adjust payment amounts within certain limits, though underfunding can cause the policy to lapse if the cash value is insufficient to cover the cost of insurance charges.
Premium amounts are influenced by the insured's risk classification assigned during underwriting. Preferred Plus (the healthiest class) receives the lowest rates, while substandard or table-rated individuals pay higher premiums that reflect their elevated mortality risk. Tobacco use typically doubles or even triples premium costs, as tobacco users have significantly higher mortality rates. Paying annually rather than monthly often provides a small discount, as carriers avoid the administrative costs and collection risk associated with monthly billing.
Beyond the base premium, some permanent life insurance policies allow additional premium payments through paid-up additions riders or flexible premium provisions, which can accelerate cash value growth. However, excessive premium payments can trigger modified endowment contract (MEC) status under IRC Section 7702A, changing the tax treatment of policy distributions. A licensed agent in our network can help design a premium structure that maximizes benefits while maintaining favorable tax treatment.
Important Things to Know
Premium amounts are based on age, health, gender, tobacco use, coverage amount, and policy type, with healthier applicants receiving the most favorable rates.
Level premiums remain the same for the entire policy term or lifetime; adjustable premiums in universal life may change based on carrier-declared rates and policy performance.
Failure to pay premiums by the end of the grace period (typically 30-31 days in Tennessee) can cause a policy to lapse, terminating the death benefit protection.
Annual payment may offer a small discount compared to monthly billing, as carriers reduce administrative overhead and collection risk.
Guaranteed premiums are backed by the financial strength and claims-paying ability of the issuing insurance carrier.
Tobacco and nicotine use significantly increases premiums, often doubling or tripling the cost compared to non-tobacco rates for the same coverage.
Permanent policies may allow additional premium payments to accelerate cash value growth, but excessive funding can trigger MEC status under federal tax law.
The risk classification assigned during underwriting is the single most impactful factor in determining premium rates, which is why working with multiple carriers can help find the best classification.
Seeing Premium in Practice
Illustrative example: A healthy 40-year-old non-smoking woman in Memphis applies for a 20-year, $500,000 term life policy. Based on her health classification of Preferred, she might pay illustrative premiums of approximately $25 to $35 per month. A 40-year-old male smoker applying for the same coverage could pay illustrative premiums of $80 to $120 per month, reflecting the significantly higher mortality risk associated with tobacco use. Actual premiums vary by carrier and individual underwriting. In a second illustrative scenario, a 48-year-old Knoxville professional purchases a $400,000 whole life policy with illustrative annual premiums of approximately $6,500 to $9,000 (non-smoker, preferred health). The level premium is guaranteed for life, and a portion of each payment builds cash value. After 20 years, the policy has accumulated meaningful cash value while maintaining the guaranteed death benefit. Actual premiums vary by carrier and individual underwriting.
Premium in Tennessee
In Tennessee, insurance premium rates must be filed with and approved by the Tennessee Department of Commerce and Insurance (TDCI) in accordance with TCA Title 56, Chapter 7. The TDCI reviews rate filings to ensure they are actuarially justified, not unfairly discriminatory, and not excessive or inadequate. Tennessee has no premium tax passed directly to consumers, though carriers pay a premium tax to the state as part of their operating costs. Tennessee's competitive insurance marketplace, with many A-rated (A.M. Best) carriers operating in the state, generally results in competitive premium rates across all product types. Tennessee's no state income tax environment means more of a resident's income is available for premium payments compared to states with income tax, effectively reducing the after-tax cost of life insurance protection. Tennessee law requires carriers to provide a grace period (typically 30 or 31 days) after a missed premium payment, during which the policy remains in force. The TDCI enforces these consumer protection provisions and assists Tennessee residents who experience difficulty with premium payment or billing issues.
Explore Premium in Detail
Get answers to specific questions about premium.
Related Glossary Terms
Policy Owner
The person or entity who owns a life insurance policy and has the right to make changes, name beneficiaries, and control the policy.
Read Definition →Lapse
The termination of a life insurance policy due to nonpayment of premiums after the grace period has expired.
Read Definition →Risk Class
A classification assigned during underwriting that groups applicants by their level of mortality risk, directly determining the premium rate for their life insurance policy.
Read Definition →Underwriting
The process by which an insurance carrier evaluates an applicant's risk factors to determine eligibility, risk classification, and premium rates for a life insurance policy.
Read Definition →Learn More
Frequently Asked Questions About Premium
Tennessee law requires insurance carriers to provide a grace period (typically 30 or 31 days) after a missed premium payment during which the policy remains in force. If the premium is not paid by the end of the grace period, the policy may lapse. Some permanent policies with cash value may have automatic premium loan provisions that use the cash value to cover missed premiums, preventing lapse as long as sufficient cash value exists.
It depends on the policy type. Level term and whole life policies have guaranteed premiums that do not increase during the guaranteed period. Universal life premiums may be adjusted based on policy performance. After a level term period ends, renewal premiums increase substantially based on attained age. Guaranteed premiums are backed by the financial strength and claims-paying ability of the issuing insurance carrier.
For individuals, life insurance premiums are generally not tax-deductible for personal policies under federal tax law. In some business contexts, such as key person insurance or executive benefit plans, premiums may be treated differently for tax purposes. Tennessee has no state income tax, so deductibility is evaluated solely at the federal level. Consult a qualified tax advisor for guidance specific to your situation.
The most effective ways to lower premiums include maintaining good health and a healthy weight, avoiding tobacco and nicotine products, choosing an appropriate coverage amount through a needs analysis rather than over-insuring, selecting the right policy type for your needs, and working with an agent who represents multiple carriers to find the best risk classification. Paying annually instead of monthly can also provide a modest discount.
The factors with the greatest impact on premium cost are the insured's age (premiums increase with age), tobacco or nicotine use (which can double or triple rates), overall health and risk classification, the coverage amount requested, and the policy type (term is least expensive, permanent is more costly but includes cash value). Gender also affects rates, as women generally pay lower premiums due to longer average life expectancy.
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