Understanding Life Insurance Rate Classifications And Their Determinants

Life insurance rate classes are categories used by insurers to determine the pricing of coverage. They are based on health and lifestyle characteristics, which are used to assess a person's risk of premature death. When you apply for life insurance, the company reviews various factors, including your age, weight, gender, occupation, overall health, family health history, and more. The insurer then assigns you a risk class based on the likelihood that they will have to pay out a claim while your policy is active. Each rate class represents a different level of risk, ranging from low to high.

Height-to-weight ratio

When it comes to determining your life insurance rate class, your height-to-weight ratio is a critical factor. This ratio, also known as your Body Mass Index (BMI), is used by insurers to evaluate your health risks and potential life expectancy. A higher BMI may suggest elevated health risks, which could lead to higher premium costs.

Insurers use height and weight charts to determine your risk category, which can range from preferred plus to standard and below. These categories directly impact your premium—the lower your risk, the less costly your insurance. For example, an individual who is 5'9" tall and weighs 160 pounds may qualify for the preferred best category and enjoy lower premiums. However, if the same individual weighed 220 pounds, they might be categorized as standard, resulting in higher costs.

It's important to note that height and weight are not the only factors considered. Insurers also take into account other health conditions, lifestyle factors, and how weight is distributed across your body. Abdominal weight, for instance, is often a focal point due to its association with heart disease and other conditions that could increase an insurer's liability.

Additionally, different insurance companies may have different height and weight requirements, so it's beneficial to shop around and compare rates from multiple insurers to find the best option for your specific circumstances.

Health history

When it comes to determining your life insurance rate class, your health history is a critical factor. This includes both your personal health history and your family health history. Let's break down how each of these aspects can influence your life insurance rate class:

Personal Health History:

• Current Health Status: Insurance companies typically assess your overall health to determine your risk level. They consider factors such as your age, gender, height, weight, and any existing health conditions. For instance, high blood pressure, high cholesterol, or being overweight can impact your rating.
• Medical Conditions: Serious medical issues, such as heart disease, cancer, diabetes, or mental health issues, can significantly affect your rating. The presence of these conditions indicates a higher risk of premature death, leading to higher premiums.
• Lifestyle Choices: Your lifestyle choices, such as smoking, excessive drinking, or participation in risky activities, are also taken into account. These factors can increase your risk level and, consequently, your insurance rates.
• Medication Usage: The number of medications you take can be indicative of your health status. Individuals taking multiple medications may be considered higher-risk and placed in a higher rate class.

Family Health History:

• Serious Illnesses: If someone in your immediate family has a history of serious illnesses, such as heart disease, cancer, diabetes, kidney disease, or Alzheimer's disease, it can impact your insurance rates. This is because insurance companies view this as an indicator of your future health risks.
• Age of Onset: The age at which your family members were diagnosed with these illnesses matters. Early onset, such as a parent having a heart attack at 45, is considered a higher risk than a later diagnosis.
• Gender-Related Illnesses: If a particular illness in your family history is gender-related, it may not affect your insurance rating if you are of the opposite gender. For example, a history of ovarian cancer in the family may not impact a male applicant's insurance rates.
• Number of Affected Family Members: Insurance companies also consider the number of family members affected by a particular condition. If multiple family members have the same serious illness, it may increase the perceived risk and impact your insurance rates.
• Honesty and Disclosure: It is crucial to be honest and disclose any known family medical history. Omitting or falsifying information can lead to increased premiums or even denial of coverage if discovered by the insurance company.

Remember that different insurance companies may weigh these factors differently, so it is essential to shop around and compare rates from multiple insurers to find the best option for your specific health history.

Lifestyle choices

When applying for life insurance, insurers will look at a range of factors to determine how much you will pay for coverage. One of these factors is your lifestyle. If certain parts of your lifestyle are deemed risky, you will be charged higher premiums. Here are some of the lifestyle choices that can affect your life insurance rates:

Smoking

If you smoke tobacco, you will pay a lot more for life insurance than non-smokers. Insurance companies view smoking as a significant health risk and will charge you more for the habit. Most smokers receive a Standard or table rating health classification, which are given to riskier profiles. If you are a smoker, you may be able to lower your premium by quitting. After remaining smoke-free for a period specified by your insurance company, you may qualify for the lower, non-smoker premium.

Risky occupation

People who are employed in jobs considered risky by insurance companies will pay more for life insurance coverage. So, if your job increases the likelihood that you will die or be severely injured, you can expect to pay higher premiums. For example, if you are in the military or are a pilot, logger, commercial fisher, aircraft pilot/flight engineer, roofer, or refuse and recyclable collector, insurance companies may charge you more for coverage.

Dangerous hobbies

Much like your career, what you do in your spare time can impact your life insurance rates. If you regularly participate in hobbies considered dangerous by your insurer, such as scuba diving, skydiving, rock climbing, bungee jumping, mountain climbing, horseback riding, motorcycle riding, or flying an airplane, you will pay higher premiums even if you are young and in good health.

Financial history

If you have an adverse financial history, some life insurance companies may not offer you coverage. Bankruptcy is one of the biggest financial factors that can affect your eligibility—many insurers won't offer coverage to applicants who have filed for bankruptcy within the last five years. Others may just charge you higher rates. The further out you are from a bankruptcy, the more lenient insurers will be, and the lower your rates will be. Additionally, if you can show that you have since earned a long-term income or accumulated some assets, you should be able to get more affordable rates.

Driving history

Insurers will also look at your motor vehicle record (MVR) for any red flags. If you have any violations deemed as risky behaviour, such as a DUI, you will pay more for coverage. And if you have multiple reckless violations, some insurers may reject your life insurance application. Insurers generally look at the last five years of your driving records when making an application decision.

Criminal record

While misdemeanours won't impact your life insurance rates, any felonies on your record will. The more recent the felony charge, the higher your rates will be. Similarly, some insurers may deny your application if you have been convicted of a felony.

Age

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. The older you are, the more likely that day is to come.

Your age is one of the primary factors influencing your life insurance premium rate, whether you're seeking a term or permanent policy. Typically, the premium amount increases, on average, about 8% to 10% for every year of age; it can be as low as 5% annually if you're in your 40s, and as high as 12% annually if you’re over 50.

Term life insurance, which offers coverage for a specific term, usually has fixed rates that are set when you purchase the policy. If you take out the policy when you’re younger, you’ll usually enjoy cheaper rates that are fixed for the length of the policy.

Life insurance rates usually increase as you get older because advanced age typically corresponds to health complications or a shorter lifespan. This means insurance companies can generally expect a claim payout will come sooner for an older person and will often charge a higher premium to offset that risk.

The likelihood of a payout also increases with age, and this is a key consideration for insurers when setting rates. The older you are, the closer you are to reaching your life expectancy, which poses a higher risk to the insurance company of having to pay death benefits to your beneficiaries.

Your life insurance needs might also change as you age. A young person living with their partner with no plans of having children may need less coverage and will often qualify for cheaper life insurance rates. An older person who is supporting a family or running a business will likely require a larger policy that lasts longer. This policy will likely be more expensive compared to the younger person who needs less coverage.

Young adults are often in good health and may only need a minimum amount of coverage, which might translate to lower rates. Many individuals will find that a term life insurance policy offers adequate coverage for their needs and budget.

Middle-aged people may benefit from a term life insurance policy that is in effect until they hit retirement. If you’re planning on providing a financial cushion for your loved ones, you might consider purchasing a small permanent policy. A $50,000 to $100,000 permanent policy offers long-term financial protection for as long as the premiums are paid.

Older adults might have a harder time purchasing life insurance. Many insurers stop issuing new life insurance policies to seniors over a certain age — usually around 80. Life insurance for seniors can often be cost-prohibitive depending on their health and the type of coverage they qualify for.

Gender

When it comes to determining life insurance rate classes and premiums, gender is a significant factor that influences the pricing of coverage. Here's a detailed overview of how gender impacts life insurance:

Life Expectancy

Statistically, women tend to have longer life expectancies than men. According to data, the average life expectancy for women in the United States is approximately 80 years, while for men, it's around 74 to 75 years. This difference in life expectancy directly translates into varying insurance rates, as insurers consider women to pose a lower risk of premature death. Consequently, women generally benefit from lower life insurance premiums.

Health Factors

Men and women encounter distinct health risks throughout their lives. Men are generally more susceptible to certain health conditions that elevate their mortality risk, such as heart disease and hypertension. These gender-specific health issues contribute to higher insurance rates for men.

Occupational Hazards

Occupational choices also play a role in insurance rates. Men and women tend to pursue careers in different industries, and some fields present higher levels of risk. Men are more likely to work in inherently dangerous sectors, such as construction, mining, or logging, which increases the potential for accidents and fatalities. Consequently, men's insurance rates may reflect these occupational hazards.

Lifestyle Choices

Men and women often exhibit different lifestyle habits that can impact their health and life expectancy. Men are statistically more inclined to engage in risky behaviours, such as smoking, excessive alcohol consumption, drug use, and high-risk hobbies like extreme sports. These choices can increase their likelihood of an early death, thereby influencing their insurance rates.

Impact on Premiums

The combination of factors, including life expectancy, health risks, occupational hazards, and lifestyle choices, results in notable differences in insurance rates between genders. On average, women pay approximately 24% less for life insurance than men. However, it's important to remember that gender is just one aspect of a comprehensive evaluation, and other factors, such as age, family medical history, and individual health history, also play a significant role in determining insurance rates.

Frequently asked questions