Life Insurance: Every Cent Counts

Life insurance is a financial tool that can be used to provide financial protection for loved ones in the event of an untimely death. The cost of life insurance varies depending on several factors, including age, gender, health, and lifestyle choices. The younger and healthier an individual is, the lower their premiums are likely to be. For example, a 35-year-old man in good health can expect to pay around $14 per month for a $250,000 policy over 20 years, which equates to less than 50 cents per day. On the other hand, a 40-year-old with the same policy details can expect to pay an average of $26 per month.

Life insurance costs: how much do people spend on average?

The cost of life insurance varies depending on several factors, including age, gender, health, and lifestyle choices. However, on average, life insurance costs around $26 per month for a 40-year-old individual with a 20-year, $500,000 term life policy, which is the most common term length and amount sold. This equates to just under 90 cents per day.

Factors Affecting Life Insurance Costs

Age and gender play a significant role in determining life insurance rates. Generally, younger individuals pay less for life insurance than older individuals, as they are less likely to have health problems. Additionally, women tend to pay less than men of the same age due to their longer life expectancy.

Health is another critical factor, with insurers evaluating height, weight, medical history, and pre-existing conditions. Individuals with health conditions, such as diabetes or hypertension, can expect to pay higher premiums. Lifestyle choices, such as smoking or engaging in risky activities, can also increase rates.

Types of Life Insurance and Their Costs

There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance is less expensive and covers a set number of years without building cash value. On the other hand, permanent life insurance typically lasts a lifetime and includes a cash value component, making it substantially more expensive than term life insurance.

Calculating the Right Amount of Coverage

When determining the appropriate amount of life insurance coverage, it is recommended to consider financial obligations, such as mortgage payments or college fees, and subtract liquid assets. Additionally, financial experts often suggest purchasing coverage worth at least ten times your annual income.

Ways to Lower Life Insurance Rates

Maintaining a healthy lifestyle, quitting smoking, avoiding high-risk hobbies, and applying early for life insurance are all effective ways to lower your life insurance rates.

How does age impact the cost of life insurance?

Age is one of the primary factors influencing your life insurance premium rate, whether you're seeking a term or permanent policy. The older you are when you purchase a policy, the more expensive the premiums will be. This is because the cost of life insurance is based on actuarial life tables that assign a likelihood of dying while the policy is in force. In other words, the older you are, the more likely you are to become ill or die while under coverage, and the cost of insurance increases accordingly.

The premium amount typically increases 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 might pay an average of $1,125 for a new, 20-year term policy with $1,000,000 of coverage. The same policy purchased at age 46 will cost roughly $1,225, and $1,345 if purchased at age 47.

The increase in monthly premiums as you age is much smaller if you are young, compared to when you are older. For instance, the average life insurance quote only increases by 6% between ages 25 and 30, but it jumps by 86% between ages 60 and 65.

Age can also affect whether a person will qualify for life insurance coverage at all, with qualifying medical exams becoming increasingly stringent as you get older. Many insurers only offer 20-year term policies to those aged 18 to 70, and some forms of permanent life insurance may have restrictions for older applicants, such as 65 or 70 years of age.

In summary, age significantly impacts the cost of life insurance, with premiums increasing steadily as you get older. The likelihood of health complications and a shorter lifespan contribute to this increase, making it more expensive to insure older individuals. Therefore, it is generally advisable to purchase life insurance as early as possible to secure lower rates.

How does gender affect the cost of life insurance?

Gender is one of the factors that affect the cost of life insurance. Men generally pay more for life insurance due to a shorter average life expectancy and a higher risk of an early heart attack, among other risks. Women live longer on average than men, and this fact is reflected in the rates, especially if the policy is for a longer period and stretches into the senior years. The average lifespan of a man is 74, while that of a woman is 79, and this difference increases the likelihood of a death benefit payout for men, leading to higher premiums.

In addition to life expectancy, men and women face different health risks that can impact their insurance rates. Men are generally more prone to certain conditions, such as heart disease and hypertension, which increase their mortality risk. Gender-specific conditions, such as prostate or testicular cancer, can also impact men's life insurance rates. On the other hand, women may face higher rates due to gender-specific conditions like ovarian or breast cancer, pregnancy, and hormonal conditions.

Occupational hazards also play a role in gender-based insurance rates. Men are more likely to work in high-risk fields, such as construction, mining, or logging, which increases the chances of accidents and fatalities. This is reflected in the insurance rates, with men typically paying more for coverage.

Lifestyle choices are another factor influencing insurance rates. Men are more likely to engage in risky behaviours, such as smoking, heavy alcohol consumption, drug use, and extreme sports, which can increase their likelihood of passing away. As a result, insurers may charge higher premiums to men who engage in these activities.

It is important to note that while gender plays a role in life insurance rates, it is not the only factor considered by insurers. Medical history, lifestyle choices, age, family medical history, and other factors can also significantly impact the cost of life insurance for both men and women.

How does smoking impact the cost of life insurance?

Smoking has a significant impact on the cost of life insurance, with smokers paying substantially higher premiums than non-smokers. This is because smoking is the leading cause of preventable death in the US, contributing to nearly 480,000 deaths annually, according to the American Lung Association's 2024 report. As a result, smokers are considered high-risk policyholders by insurance companies, as they are more likely to develop health issues and pass away at a younger age.

Life insurance companies typically classify applicants into separate risk classes, with smokers placed into a "Tobacco Preferred" or "Standard Tobacco" category, resulting in higher premiums that reflect the greater likelihood of tobacco users facing serious health issues. The increase in premiums for smokers can be as high as double or triple the rate of a non-smoking policy, with some sources stating that smokers can pay nearly four times more for their life insurance policy.

The specific impact of smoking on the cost of life insurance depends on various factors, including age, gender, and the coverage amount. For example, a healthy 40-year-old male smoker can expect to pay around $1,531 per year for a $500,000 20-year term life insurance policy, while a non-smoker in the same category would pay approximately $397 per year.

In addition to cigarettes, life insurance companies also consider other forms of tobacco and nicotine use when determining an individual's risk class and premium rates. This includes vaping, e-cigarettes, cigars, nicotine replacement therapies, marijuana use, and chewing tobacco. Life insurance companies typically verify an individual's tobacco use through a medical exam and a review of their medical history, including blood, saliva, urine, and hair tests that can detect nicotine and its byproduct, cotinine.

While smoking does increase the cost of life insurance, it is still possible for smokers to obtain coverage. However, it is crucial to be truthful on life insurance applications, as lying about smoking habits may result in denied coverage or withheld benefits. Additionally, smokers who quit smoking for at least a year may be able to reclassify into a non-smoker rate category, resulting in lower premiums.

How much life insurance should you buy?

The amount of life insurance you should buy depends on your age, income, family situation, financial obligations, and other factors. Here are some guidelines and methods to help you estimate how much life insurance coverage you need:

Rules of Thumb

• A common rule of thumb is to buy life insurance worth 10 times your annual income. However, this rule doesn't consider your family's specific needs, savings, or existing life insurance policies.
• Another guideline is to allocate at least 6% of your gross income towards life insurance, plus an additional 1% for each dependent.

The DIME Method

The DIME method considers four key factors:

• Debt: Include all your debts, such as credit card debt, student loans, and personal loans. You can exclude your mortgage debt if income replacement would cover mortgage payments.
• Income: Multiply your annual income by the number of years your family will need financial support. Consider the number of years until your youngest child graduates high school or college.
• Mortgage: Calculate the remaining balance on your mortgage and any other mortgage-related debts, such as a second mortgage or HELOC.
• Education: Estimate the cost of sending your children to college, including tuition, room, and board.

Add up these four factors and subtract any existing savings and life insurance policies to get an estimate of your life insurance needs.

Human Life Value (HLV) Method

This method is based on your future earnings potential and suggests the following guidelines:

• Ages 18-40: Buy life insurance worth 30 times your income.
• Ages 41-50: Buy life insurance worth 20 times your income.
• Ages 51-60: Buy life insurance worth 15 times your income.
• Ages 61-65: Buy life insurance worth 10 times your income.
• Age 65 and above: Base your coverage on your net worth instead of income.

Other Considerations

• Family situation: If you have a stay-at-home parent, consider the cost of childcare and other services they provide. Ensure the surviving parent has enough financial support to cover these expenses.
• Existing assets and coverage: Subtract your existing savings, investments, and any existing life insurance policies from your total financial obligations to determine the gap that life insurance needs to fill.
• Future expenses: Consider future expenses such as college tuition for your children or end-of-life expenses.
• Health and lifestyle: Your health, smoking status, hobbies, and occupation can impact your life insurance rates. Maintaining a healthy lifestyle and avoiding high-risk activities may help lower your premiums.
• Term vs. whole life insurance: Term life insurance covers a set period, while whole life insurance lasts a lifetime and includes a cash value component. Term life insurance is generally more affordable, but whole life insurance provides longer-lasting benefits.

Remember, these are just estimates, and it's essential to consult a financial professional to help you determine the right amount of life insurance coverage based on your unique circumstances.

Frequently asked questions