Once you decide to buy life insurance, th𒀰e next step is to determine what premium you can afford to pay to obtain the coverage and benefits you want. Premiums vary b🎉ased on a number of factors, beginning with the type of policy you plan to buy.

While some policies always charge the same premium each month, others allow you to change your payments over time. It's important to understand how this works so you can budget appropriately and make sure you get the best insurance value out of your premiums.

How the Premium for Insurance Is Calculated

Life insurance companies use a variety of factors to determine how much premium they will charge for a 澳洲幸运5官方开奖结果体彩网:life insurance policy. These variables include your age, sex, health rating, the assumed rate of return, 澳洲幸运5官方开奖结果体彩网:payment mode, additional riders, and whether the 澳洲幸运5官方开奖结果体彩网:death benefit is level or increases over time.

Some life insurance policies offer high-benefit payouts, but these higher payouts come at the cost of higher premiums. Policyholders might be tempted to use 澳洲幸运5官方开奖结果体彩网:premium financing to pay the higher premiums. However, tꦆhis financing is not risk-free.

The premium is also based on how long the policy is designed to last. Longer-lasting policies cost more. A 20-year term policy costs mo𒉰re than a five-year term policy, while a permanent policy that never expires costs the most.

Permanent policies also build 澳洲幸运5官方开奖结果体彩网:cash value, which grows over time. The performance and growth of your cash value can significantly affect the premium. If your cash value grows by more than expected, you 澳洲💎幸运5官方开奖结果体彩网:might be able to ಌreduce your premium. Poor 💧cash value growth could increase your future premiu♋m.

Insurance agents use 澳洲幸运5官方开奖结果体彩网:illustration software provided by the carrier to model a policy's future performance. When you receive a hypothetical illustration for 澳洲幸运5官方开奖结果体彩网:permanent life insurance, it will predict your cash value growth and the cost of your life insurance over time. That way, you can plan your budget and premium payments accordin👍gly.

Premiums and the Type of Life Insurance

The type of life insurance makes a big difference for the premiums as well. Term policies charge a lower premium because they only provide temporary coverage. The premium usually stays the same during the entire term as well. 澳洲幸运5官方开奖结果体彩网:Permanent policies do not expire and cost more.

There are several different types of permanent policies. 澳洲幸运5官方开奖结果体彩网:Whole life insurance policies charge a set premium that does not change. 澳洲幸运5官方开奖结果体彩网:Universal life insurance policies 🐟allow you to adjust the policy up and down each year.

While this budget flexibility is nice, it also means you need to plan properly. If you pay too little premium in the early years, your policy could run short of cash value to cover the insurance costs. Then you would need to pay much higher premiums or you'd risk losing coverage. A 澳洲幸运5官方开奖结果体彩网:universal life insurance policy will give you recommendations for how much to pay with a planned premium, no-lapse premium, and minimum premium.

Planned (Target) Premium

The planned (or target) premium is a suggested premium that indicates the amount of premium that should keep a given universal life policy in force in the coming years. The planned premium is based on conservative financial assumptions.

The illustration software will model the target premium. The amount is based on variables the 澳洲幸运5官方开奖结果体彩网:insurance broker enters into the program, including an assumed 澳洲幸运5官方开奖结果体彩网:rate of return. The assumed rate of return is important, since a higher non-guaranteed return results in a lower pr🐎emium (and vice versa). However, maintaining the planned premium does not guarantee the policy will remain in force if the rate of return falls short of projected returns.

No-Lapse Guarantee Premium

The no-lapse guarantee premium is the amount that must be paid to ensure that the policy will stay in force for a set number of years, regardless of actual policy performance. During the no-lapse period, the insurer guarantees the coverage will continue, even if the cash value drops to zero. However, once the guarantee period ends, the policy could lapse unless a significantly higher premium is paid. The no-lapse period can be as few as five years or last to age 121.

Minimum Premium

The minimum premium is the amount that must be paid to put the policy in force. This amount is usually insufficient to keep the coverage in force for life (unless the insured person is very young). This premium may be used, for example, when a 1035 exchange from another policy is pending. It may also be used if the policy is 澳洲幸运5官方开奖结果体彩网:owned in a trust when issued, and gifts will be made to provide additional funding.

Premiums and Cash Value

Cash value builds in permanent policies on a 澳洲幸运5官方开奖结果体彩网:tax-deferred basis. You can also tap into your gains tax-free through loans. In the past, investors abused this tax break. They paid very high pre꧑miums into policies relative to the death benefit to use life insurance mainly as an 🐻investment. In response, the government created rules for how much premium you can pay into these policies.

Regulatory Compliance Tests

The 澳洲幸运5官方开奖结果体彩网:guideline premium test and the 澳洲幸运5官方开奖结果体彩网:cash value accumulation test (C൲VAT) provide IRS-approved ways to determine the tax treatment of a life insurance policy. The guideline premium test requires a policy to have at least a minimum amount of at-risk death benefit (insurance that exceeds the cash value), while the cash value test compares the death benefit to the cash value. Both tests determine the policy's corridor amount: the difference between the policy's 澳洲幸运5官方开奖结果体彩网:death benefit and its cash value. The acceptable size of the corridor varies by the type of test administered.

The corridor amount is greater when the policyholder is young, It decreases as a percentage of the total death benefit at an individual age until it eventually drops to zero by age 95. If the premium exceeds these guidelines, then the policy could be taxed as an investment rather than as insurance.

Modified Endowment Premium

The modified endowment premium is the amount that makes an insurance policy a 澳洲幸运5官方开奖结果体彩网:modified endowment contract (MEC). Under the Technical and Miscellaneous Revenue Act of 1988, distributions from a policy determined to be a MEC, such as loans or cash surrenders, are potentially taxable and could be subject to a 10% penalty tax by the . However, the death benefit remains income-tax-free.

A policy can become an MEC when the combined premiums paid during the first seven years that the policy is in force exceed the seven-pay test premium. The insurance company's illustration software automatically calculates the seven-pay premium amounts.

The IRS has established these measures to help curb abuses that occur when insurers sell policies with a nominal amount of insurance designed to build a large amount of tax-free cash value. The seven-pay amount varies by age and type of policy.

Which Policy and Premium ⭕Amount Should You Pick?

The amount of🐷 premium you should pay depends on 🧜how you design the coverage and how much you can afford.

Term policies have the lowest premiums but do not accumulate any cash value and eventually expire. Whole life policies build have cash value and carry a higher premium that doesn't change. Universal life policies have flexible premiums and assume fixed interest rates of return. 澳洲幸运5官方开奖结果体彩网:Variable universal life policies, in contrast, offer the greatest risk-reward potential, allowing the cash value to be invested in mutual fund sub-accounts.

To build the most cash value in a policy, you want to pay t𓂃he maximum allowed premium and select a level death benefit that helps minimize the amount of pure insurance you are buying. You want to overfund the policy as much as policy without pushing past the rules that would turn it into a M𒁃EC.

If you want to maximize your death benefit, universal and variable policies illustrated with a high rate of return and increasing death benefit provide the highest payout at death. A policy with a 澳洲幸运5官方开奖结果体彩网:level death benefit, say $500,000, includes your cash value as part of the death benefit. A policy with 澳洲幸运5官方开奖结果体彩网:increasing death benefits would pay $500,000 plus any cash value. 

The Bottom Line

When designing 澳洲幸运5官方开奖结果体彩网:life insurance coverage, the right premium really comes down to why you are buying꧑ the coverage. Is it for temporary or permanent protection? Do you prioritize cash value accumulation, the death benefit, or b💫oth?  A life insurance agent can explain all your different options to design a plan with the premium that best fits your needs.