What makes premiums higher in whole life insurance during the early years?

In whole life insurance, the premiums are designed to cover several components, including the cost of insurance and other related expenses. In the initial years, the premiums tend to be higher primarily due to higher mortality costs compared to the premiums collected. This is because, at younger ages, the mortality rates are relatively low; however, as the policyholder ages, the insurer needs to account for the increasing risk of mortality, which typically leads to higher anticipated costs.

During the early years, when a policyholder is relatively younger and healthier, the premium structure must reconcile the insurer's need to ensure sufficient funds are available for future claims that might arise in later years. Additionally, since whole life policies are designed to provide lifelong coverage, there is a need to front-load the premiums to build cash value in the policy over time.

This approach results in premiums being higher in the early years, not just to address current costs but to also proactively fund future liabilities that will arise as the insured ages. The long-term nature of whole life insurance means that these early higher costs balance out over time, and as cash value builds, the policyholder benefits from this investment aspect of the insurance.