Why are annual life insurance policies cheaper?
[social_share]Annual life insurance policies tend to have lower premiums than policies written for a longer term. For this reason, it’s often seen as a cheaper option; although that’s not entirely true. Longer life insurance terms can actually be cheaper, even though at the beginning the premiums may seem astronomical in comparison.
Life insurance premiums for longer-term policies are higher than the same coverage would be for an annual policy. This is because the premiums are usually fixed, remaining the same throughout the period the life insurance covers. Insurance companies have found that policy holders don’t like their premiums rising every year, and they are far more likely to drop their coverage if this happens. Therefore, the life insurance premium is calculated at the beginning of the term and it usually stays fixed.
On the other hand, the life insurance premiums of a person with an annual policy will rise every year. This is because their life insurance reflects their life expectancy, and a person’s life expectancy in their thirties is far better, especially over the next year, than it is in their fifties. People naturally become less healthy over time.
A longer-term life insurance policy, which fixes the premiums at the start, must reflect the life expectancy of the policy holder ten and twenty years from the policy’s issuance, rather than just over the next year. This is why the premium for a longer-term policy is higher, even when this policy has the same terms and the same payout. It is not in fact insuring the same risk.
Despite this, when calculated over the full ten to twenty year term, longer-term life insurance is generally cheaper than annually-purchased life insurance, even though the initial premiums are higher. The difference is that the premium doesn’t rise over time, and towards the end of the term that premium will tend to be far lower than the one charged by an annual life insurance policy for that person at that age. As well, there are lower administration and marketing costs on a long-term policy.
It can be quite confusing when comparing the prices of life insurance over different terms, due to the fact that they are covering different risks. This is why it’s a good idea to only compare policies with the same term and payout, and so to decide on the term and payout before comparing prices.
