Understanding Life Insurance Rate Calculation Factors

Life insurance rates are calculated based on several factors, including age, gender, health, lifestyle choices, and medical history. The primary unit for determining a life insurance rate is the rate per thousand, which varies depending on factors such as age and gender. The cost of life insurance is mainly based on life expectancy, and the younger and healthier an individual is, the lower the life insurance rates will be. Life insurance premiums are also influenced by the type of policy, coverage amount, and risk factors associated with the insured group. Additionally, certain pre-existing health conditions and habits, like smoking, can significantly impact life insurance rates.

Age: The older you are, the higher the premium

Age is one of the most important factors in determining life insurance premiums. The older you are, the higher the premium will be. This is because the likelihood of needing to make a payout increases with age, and life expectancy decreases.

Insurers use actuarial tables to estimate life expectancy and mortality rates, which help determine how much an individual will pay for life insurance coverage. These tables show that the older you are, the more likely you are to become ill or die while under coverage. As a result, the cost of life insurance is based on these tables, which assign a likelihood of dying while the policy is in force. The older you are, the more likely that day is to come.

The premium amount increases on average by about 8% to 10% for every year of age. This can be as low as 5% annually if you're in your 40s and as high as 12% annually if you're over 50. For example, a 45-year-old male will pay on average $1,125 for a new, 20-year term policy with $1,000,000 of coverage. The same policy purchased at age 46 will cost $1,225, and at age 47, it will cost $1,345 per year.

Age can also affect whether a person will qualify for life insurance coverage at all. Older ages can limit the applicant's options, and most carriers only offer 20-year term policies to those aged 18 to 70. After that, you may not be able to get a term that long.

In addition, the older you are, the more testing a carrier will require for coverage. For instance, a medical exam including blood and urine tests may be required for a 44-year-old applying for $500,000 of coverage. At 45, the same person might need a resting EKG in addition to the medical exam and lab work.

Life insurance is designed to pay out a death benefit to the person or persons named as beneficiaries when the insured person passes away. In exchange for this coverage, the policyholder pays a premium to the life insurance company. The older the policyholder, the more expensive it is to provide this coverage.

Gender: Women pay less than men

Women generally pay less for life insurance than men because they have a longer life expectancy. This is the second most reliable predictor of how long someone will live, after age. Observations in every country going back to at least 1880 have shown that men tend to die earlier than women, largely due to genetics and hormones. According to the latest data from the Centers for Disease Control and Prevention, life expectancy in the US is 79.3 years for women and 73.5 years for men.

Life insurance companies look at a range of health factors when deciding whether to charge their best rate or a higher rate. Some of these factors include blood sugar levels, nicotine use, liver and kidney function, prescription medications, and medical history. However, insurers sometimes apply different standards of health to male and female applicants, particularly regarding blood pressure, cholesterol, and body mass index. These differences can lead to varying premiums.

Women are also more likely to be underinsured, with only 47% of women having life insurance compared to 58% of men, according to a 2021 consumer study by LIMRA. This could be due to continued income gaps, as many people base their life insurance coverage on a multiplier of their income.

Health: Premiums are lower for those with fewer health conditions

Health plays a significant role in determining life insurance rates. Generally, the fewer health conditions you have, the lower your rates will be. Certain pre-existing conditions, such as heart disease, diabetes, or cancer, usually have a more substantial impact on your premiums. Other conditions, like asthma, sleep apnea, or high blood pressure, typically have a lower impact.

During the underwriting process, insurance companies will often request a medical examination, review your medical records, and access prescription drug databases to assess your health. They will consider your medical history, including past and current health problems, treatments, and medications. Additionally, they will evaluate your height, weight, and body mass index (BMI).

Risky behaviours, such as smoking, drinking, and drug use, can also affect your rates. Life insurance for smokers tends to be more expensive, as smoking is associated with a higher risk of developing health issues. Even occasional smoking or the use of other nicotine products can result in higher premiums. However, if you quit smoking after purchasing an insurance plan, you may become eligible for non-smoker rates from your provider.

It is important to note that addressing controllable health conditions and making positive lifestyle changes can help you manage and potentially reduce your life insurance premiums.

Lifestyle: Hazardous jobs and risky activities can increase rates

When it comes to life insurance, insurance companies are concerned with one key thing: risk. When deciding whether to grant you coverage and at what cost, they assess the risk of having to pay out your policy. This process is called underwriting.

Life insurance companies will take an in-depth look at factors such as your family health history, age, gender, health, hobbies, and medical history to determine how risky you are to insure. The younger and healthier you are, the cheaper your premiums will be.

If you have a hazardous job or participate in risky activities, you can expect to pay more for life insurance. This is because these jobs and activities make you more susceptible to the dangerous forces of nature, increasing the odds of dying by unnatural causes.

Some hazardous jobs and risky activities that can increase your life insurance rates include:

• Aviation sports (e.g. paragliding, base jumping, skydiving)
• Professional pilots
• Scuba diving
• Racing (car or motorcycle)
• Fishing
• Structural iron and steel work
• Electrical power-line installation and repair
• Truck driving
• Farming
• Construction work
• Mining
• Offshore oil drilling
• Firefighting
• Police work

It's important to note that not all insurance providers consider the same activities hazardous. Additionally, occasional participation in a hazardous activity may not necessarily classify you as a high-risk applicant. For example, going scuba diving for the first time on vacation likely won't impact your life insurance rates.

If you engage in hazardous jobs or risky activities, it's essential to be honest about them when applying for life insurance. Failing to disclose these activities may result in the insurance company denying your claim if you die while performing them.

Coverage: The more coverage, the higher the premium

The amount of coverage you choose for your life insurance policy will have a direct impact on the premium you pay. The premium is the amount you pay your insurance company to keep your coverage active, and it is usually paid monthly or annually. The more coverage you want, the higher the premium will be.

This relationship between coverage and premium exists because higher coverage amounts come with higher risks for the insurance company. The higher the coverage amount, the more the insurance company will have to pay out if a claim is made. To compensate for this higher risk, the insurance company will charge a higher premium.

The impact of coverage amount on premium can be significant. For example, a $500,000 coverage amount will have a lower premium than a $1,000,000 coverage amount for the same type of policy and the same demographic factors. The difference in premium can be hundreds or even thousands of dollars per year.

When deciding on the coverage amount for your life insurance policy, it's important to consider your financial situation, future goals, and the needs of your dependents. The coverage amount should be sufficient to cover your dependents' living expenses, pay off any debts, and provide for future expenses such as education or medical care.

It's also worth noting that the type of life insurance policy you choose can affect the impact of coverage amount on premium. For example, term life insurance premiums are generally cheaper than whole life insurance premiums for the same coverage amount, as term life insurance is active for a fixed period, whereas whole life insurance is permanent. Additionally, adding riders (additional benefits) to your policy can further increase the premium.

Frequently asked questions