Life Insurance Blog

Long-term life insurance policies tend to have higher premiums than short-term policies. However, this doesn’t necessarily mean the long-term policy is more expensive, as the higher cost is due to the structure of life insurance policies, rather than fees or the insurance company’s profit margin.

To understand why long-term life insurance policies are more expensive, one must remember the point of a life insurance policy. It insures the policy holder’s life against death or disability, and so relies heavily on various indicators as to how long that person is likely to live, or more to the point whether that person is likely to die or become disabled in the forthcoming period, while the insurance is in effect.

The life insurance company will examine a number of factors before calculating the premium, one of the most important being the person’s age. A person is far more likely to die in the year after their fifty-fifth birthday than they would in the year after their thirty-fifth birthday. If all other factors were equal, the policy holder’s life insurance premium at thirty-five would be lower than at fifty-five.

With a long-term life insurance policy, for example one with a twenty-year term, a thirty-five year old is not just insuring his or her life over the next year, but also over the next twenty years. Of course this means the insurance premium will be higher, because the policy holder isn’t only insuring themselves at thirty-five, but also at forty-five and fifty-five.

There are two ways for the life insurance provider to deal with this. The first is through escalating premiums, with a low premium in the first few years that gradually rises in cost. While this reflects the risks more accurately, it tends to be unpopular with policy holders and also has a higher administrative cost. As well, policy holders are far more likely to cancel their insurance when the premiums rise over a certain level.

The alternative is to keep the same premium throughout the life of the policy. This averages the premiums very well but at the same time makes them considerably higher at the start of the term than they would be if the policy was only for one or five years. But at the end of the term, the life insurance premium is considerably lower than if the same person purchased a short-term policy at that period in their life.

As well, long-term life insurance premiums tend to have lower administrative and marketing costs, although these benefits tend to be masked by the effect of the long term.