What is a premium payment for life insurance?

• The information and results provided by this calculator takes into account information you enter but does not consider your personal circumstances, including your current lifestyle expenses, other financial commitments or other needs and objectives. When making any financial decision you should take into account your financial situation, needs and objectives.
• This calculator estimates your life insurance needs based on the limited information that you provide and assumptions made about the future. It does not consider your overall insurance needs, including for temporary or permanent disability, trauma, private health, or long-term income protection cover.
• The calculator estimates the amount of cover needed to provide a lump sum, ongoing income support, or a combination both, that is enough to meet the financial needs and maintain the living standards for your family in the event of your death. The calculator does not consider your eligibility for insured cover or the affordability of the estimated insurance cover.
• Estimates generated by the calculator are based on assumptions (default assumptions or assumptions as modified by you). These may not be accurate in the future if your personal circumstances or legislation changes.
• The calculator is not a substitute for financial advice and should not be relied on for making decisions about a particular financial product or class of financial product. Consider getting advice from a licensed financial adviser who can develop a financial plan tailored to your needs and objectives.
• We recommend you do a new calculation regularly as your circumstances, financial markets, tax and other rules can change.

The calculator is not intended to recommend a financial product or an interest in a financial product. However, the issuer of this calculator believes that the default assumptions are reasonable, as outlined in the sections below.

You can alter the default inputs and settings throughout the calculator.

Any alteration or input you provide will apply for the whole of the calculation period. Be aware that even small changes to assumptions can make a big difference to the results.

Calculation methodology

This calculator considers your life insurance needs, in the event of your death, across the following areas:

• Funeral costs - covers immediate expenses such as the cost of your funeral.
• Mortgage - having enough insurance to pay off your mortgage. Also consider whether your surviving dependents would sell or downsize your home.
• Other debts - an amount sufficient to pay off your other debts (e.g. other loans, credit card debts, etc)
• Children's education - if you have dependent children you may want to allow for the cost of education expenses.
• Help with your family's living costs - you may wish to include an amount to cover, or contribute to, your family's ongoing living expenses.

Your calculated insurance needs are offset by any available assets that can be used to fund immediate or ongoing costs.

Your funeral costs

By default, the calculator assumes funeral costs upon death of $5,000. You can change this amount in 'Your funeral costs' to reflect your expected funeral costs. Your immediate financial needs in the event of your death will depend on your personal circumstances, however as a default $5,000 is expected to be a reasonable estimate for funeral costs.

Your mortgage

By default, the calculator does not include any mortgage repayment or assets released from the sale of your home. Consider your outstanding mortgage debts and your family's plans regarding your home in the event of your death. Any mortgages you wish to be repaid less any sale proceeds of your home can be added in 'Your mortgage'.

Your other debts

By default, the calculator does not include any debt repayment. Consider your outstanding debts and which ones you would like to include in the assessment of your insurance needs. Any debts you wish to include can be added in 'Your other debts'.

Your children's education expenses

By default, the calculator does not include any funding for you children's education expenses, assumed to be payable from age 5 to 18. This can be added in 'Your children's education expenses' for each child.

The calculator assumes costs entered will increase each year with the inflation rate assumption found in 'Results'. By default, the calculator uses an inflation rate of 2.5% pa, which MoneySmart believes to be reasonable under current economic conditions. You can change this figure in 'Results'.

The calculator determines the present value of future costs by assuming the insured amount is invested and earns a return (net of tax and expenses) equal to the interest rate found in 'Results'. By default, the calculator uses an interest rate of 3.0% pa. You can change this in 'Results'.

Help with your family's living cost

By default, the calculator does not include an amount for ongoing living costs. You can enter an amount to cover up to 10 years of ongoing living costs in 'Help with your family's living cost'.

If you have elected to clear any outstanding debts in the event of your death, consider the impact this may have on your family's ongoing living expenses. Also consider any other sources of income your family will receive that can be used to meet their ongoing living expenses.

The calculator assumes costs entered will increase each year with the inflation rate found in 'Results'. By default, the calculator uses an inflation rate of 2.5% pa, which MoneySmart believes to be reasonable under current economic conditions. You can change this figure in 'Results'.

The calculator determines the present value of these costs assuming the insured amount is invested and earns returns (net of tax and expenses) equal to the investment rate of return found in 'Results'. By default, the calculator uses an investment return of 3.0% pa. MoneySmart acknowledge that the return earned on the funds received from your insurance will be highly dependent on your personal circumstances and the prevailing economic conditions.You also have the ability to change the investment rate of return in 'Results'.

Your assets

In assessing your life insurance needs, the calculator considers the available assets you or your family may have to offset these needs. By default, the calculator does not include any assets. You can make changes to these assets in 'Your assets' which consists of:

• Superannuation
• Savings
• Investment property
• Other investments
• Other assets

Insurance cover need

The overall life insurance cover shown in the calculator is the total of immediate financial needs (funeral expenses, outstanding mortgage and debts to be paid) plus the present value of any ongoing living costs (education expenses, ongoing living expenses) less available assets you have, to fund your family's financial needs in the event of your death.

Tax

The calculator does not take into account any tax that may be payable on insurance benefits received by you or your beneficiaries. Any tax that may be payable will depend on the circumstances of the payment and the source of any insured benefits. You may wish to get advice from a licensed financial adviser.

A life insurance premium is the payment you make as your portion of the cost of an insurance policy. You can usually pay your life insurance premium monthly, quarterly, semi-annually, or annually. If you do not pay your premium, your life insurance policy will be canceled, and your beneficiary will not receive the death benefit.

When you build a family with someone you love, you hope that your family will stay together, be happy and healthy, and nothing will get in the way of your future growth. But you also know there is no guarantee of what the future will bring. While you can hope for a future without any setbacks, accidents, mishaps, health issues, or death, it is likely that there will be bumps in the road as you embark on life’s journey. Some or all of your family members may need help along the way. And that help may be needed because of the death of the person or people who support the family financially.

While you may think that you can live forever, the reality is that death can occur without any warning. Protecting the family that you love in case of the death of a family member is what life insurance is for. While you can’t predict the future, you can protect our family in the case of death. You can support your family even after you’re gone to reduce the hardship during a time of grieving and loss.

How does life insurance work?

Life insurance basics are pretty simple and straightforward. You buy a life insurance policy for a fee, and then when you die, the insurance pays out a predetermined amount to your family.

If you are the person or one of the people who supports your family financially, then what will happen to them if your salary is suddenly gone? If you aren’t the only person whose income supports your family, what happens to your spouse or partner if your income stops? These are the questions you need to ask yourself when you consider buying a life insurance policy.

When you get a life insurance policy, you are protecting your spouse, children, and family from what would happen if you and your financial support are gone due to your death.

How do life insurance premiums work?

Life insurance works in a similar fashion to most insurances. You pay a fee to receive an insurance benefit. In the case of life insurance, the benefit is that your family will receive a predetermined amount of money when you die. The fee that you pay for your life insurance policy is called a premium.

As long as your life insurance premiums are up-to-date and haven’t lapsed, your beneficiaries will receive the full amount of your life insurance payout. The insurer is the company that provides life insurance. The insuree is you, the person who pays the premiums.

What factors into life insurance premiums?

Determining the premiums on life insurance is more complicated than many other types of insurance premiums. This is because there are so many factors that life insurance companies use to make that determination. With health insurance, you receive the benefits immediately. Health insurers tell you what they will cover, and these amounts are deducted from your medical bills throughout the year.

However, with life insurance, the payout may not be made for many years. So the insurance companies have to determine your chances of needing the insurance payout and when it will need to be paid. The amount of your life insurance premium basically depends on two things: who you are and what you want.

Who you are

Many life insurance companies use a process called underwriting to set your life insurance premium. This means they evaluate factors like your age, health, and lifestyle (as provided by you in an application) to classify you at a certain level of risk.

Criteria life insurance companies consider to set your premium include:

Age. The younger you are, the less likely it is that you will die. Older people have had more life experience, and that experience includes illnesses, accidents, and bad luck. As people age, they may get diseases or other health issues that are more common in the elderly. There is life insurance for senior citizens.

Sex. Women tend to live longer than men for many reasons. Some of those reasons include the type of work women do, that men take more risks in their lives, and the traditional roles of men and women in society. Men usually have higher life insurance premiums than women. (These are general rules and may differ depending on your work and lifestyle.)

Tobacco use. Cigarette, cigar, pipe, and smokeless tobacco use causes illnesses like lung cancer over a lifetime of use. That means that people who smoke are at a higher risk of death than those who don’t smoke. Therefore, smokers have higher premiums than non-smokers.

Height and weight. Height and weight are two factors of how insurers rate life expectancy. If your BMI (body mass index) indicates that you’re overweight, then your weight impacts your life expectancy. If people are overweight, they are at a higher risk of death, which can increase your insurance premium.

Family history. Many diseases including diabetes and mental illness are genetic. If your family has a history of illnesses that may be passed down to you, you are at a higher risk of death. This can include diseases that can be caused by lifestyle, like lung cancer, heart disease, and diabetes.

Previous illness. If you have already had or have illnesses like heart disease, diabetes, stroke, or cancer, you are at a higher risk of death from reoccurrence or damage due to those diseases. If you have had an organ transplant, like a kidney transplant, you are also at a higher risk.

Cholesterol. Chemical changes in your blood like high cholesterol are indicators that something is wrong with your overall health.

Blood pressure levels. Like cholesterol, high blood pressure is an indicator of health issues and puts you at a higher risk of death.

Other factors that can increase your premium include:

• Poor driving record: Puts you in more danger from vehicular accidents.
• Hazardous occupation or activities: Increases your risk from work or activity-related accidents.
• Military service: Puts you in more dangerous situations and in the presence of dangerous weapons.
• Foreign travel or residency: If you get sick or have an accident while traveling, you may not have access to the best quality of medical care, meaning your risk is higher than in the U.S.
• Felony criminal activity: Criminal activity often involves weapons, interaction with police, and higher physical risks than the average person.

One or all of these risk factors by themselves or in combination increase your chances of death.

Once your life insurance premium is determined, the life insurance company cannot raise it based on your declining health. However, if your health improves or if you stop smoking, you can sometimes get reevaluated to reduce your premium. Some life insurance plans may vary your premium based on your aging.

What you want

There are a variety of life insurance policies to choose from and each type may charge a different premium. Picking the right life insurance policy means making sure you can afford the premium, so it is important to understand the differences.

Amount and length of policy. The higher you want your life insurance policy to be worth, the more your premium will be. Term policies usually offer the lowest premium for the highest death benefit. If you choose a term policy, the longer the term you choose, the lower your premium will be.

Type of policy. Generally, a term life insurance premium is less expensive than permanent life insurance at the beginning. But with some term life insurance policies, your premium will increase as you age. Permanent life insurance premiums usually stay the same through the entire policy. Premiums for group life insurance (such as plans offered by your employer) have a set premium that everyone at the company pays, regardless of individual classification. The premium is sometimes paid by your employer. Some people who get group life insurance from their employer also purchase an individual life insurance policy for additional coverage.

Finding the right insurance policy

Finding the right insurance policy for you and your family is an important way to protect your loved ones in the case of your death. The right insurance policy may take some effort to find. Let us help you narrow down the best type of life insurance for you and your family. To find out more answers to life insurance FAQs, visit our guide.