Contrary to popular belief, our insurers are not wizards. Instead, they are people who have thought very long and very hard about risk and how to quantify it. (They are also very good at math, which is almost witchcraft.)
But you may be wondering: What specific factors do they use to determine life insurance premiums? We have also wondered that.
Read on to learn the eight factors that go into the cost of life insurance and how these things can affect your life insurance premium.
What are life insurance premiums?
Life insurance premiums are regular payments you make to your insurer in exchange for life insurance coverage. Typically, you pay your premiums monthly or annually throughout your policy term. You also usually pay tiered premiums, meaning your rates stay the same throughout the policy period.
What factors affect life insurance premiums?
So now let̵7;s look at some of the key factors that insurers will consider when calculating your monthly premium.
1. The type of life insurance
There are several types of life insurance – and the policy you choose will have a significant effect on your premium. In general, you can choose between two main types of life insurance:
Life insurance: Life insurance provides protection for a specified period of time (the “Term”). You can buy a policy that lasts 10, 15, 20, 25 or even 30 years – most choose a term that covers the years when someone else is dependent on them to pay everything from groceries to rent or mortgage.
The advantage of this type of policy is that it does not cover the years when you are older and likely to be in poorer health. (And therefore, in actuarial terms, more likely to die.) The older years may also coincide with your dependents (read: children) moving out, you paying off a mortgage, or retiring (or both). In other words, you no longer have a salary to replace, or someone to profit from your salary.
Because of this, life insurance is often the most affordable option on the market.
All life insurance: A form of permanent life insurance, whole life insurance covers you for your entire life. The advantage is that you don’t have to worry about a semester running out. The downside is that, since the coverage lasts until you die, so do the premiums. Additionally, these premiums will likely be higher because you’ll be paying for coverage through your older, likely less healthy years.
2. Your term length
If you choose term life insurance, the number of years in your term will affect the price of your policy.
For example, a 25-year-old woman in excellent health can purchase a 20-year, $250,000 policy for just $10.82 per month. The same woman would pay $14.57 per month for the same amount of coverage over one 30-year period — a nominal amount for one month, but almost double the cost over the life of the policy.
Of course, the extra cost allows for an extra decade of coverage, at a still reasonable rate. In fact, that’s less than a month’s worth of content from your favorite streaming service.
3. How much life insurance you buy
This is the other big factor that makes sense: To get more of something, you usually have to pay more. When you buy life insurance, the value of the policy is equal to the death benefit that your loved ones would receive in the event of your death. With that in mind, a $3 million policy will cost more than a $250,000 policy, all else being equal.
So how much makes sense to you? A good rule of thumb is that you want insurance worth 5 to 10 times your annual salary. This is because the money would be used by your loved ones in the event of your death, to pay for everyday necessities and larger, long-term expenses such as tuition or housing.
That said, everyone’s needs are different, and you can start by using an online life insurance calculator to determine how much life insurance coverage makes sense for you.
4. Your age
Time remains undefeated, as they say, and that saying also applies to life insurance premiums. If you are older, you are likely to pay a higher premium than the younger version of you would have paid.
Why is it like that? Well, again, in actuarial terms, you are closer to your death. (That’s okay, it’s true for everyone.) You’re more likely to get sick, and your health may decline, so your life expectancy is shorter.
It’s not fun, but look on the bright side: it’s just one reason why the best time to buy life insurance is always now.
5. Your gender
Gender also plays a role in determining life insurance premiums. Women tend to live longer than men, so they typically pay lower premiums for the same coverage. This is because women are considered to be at a lower risk of dying than men of the same age and health condition.
6. Your health and health history
It’s a cold, hard fact (and life insurance): The less healthy you are, the greater the odds of your death. So if you have chronic health conditions (like diabetes), or are just out of shape, you’ll probably pay a higher life insurance premium than if you run a marathon… while lifting weights… and eating a salad… and undergoing a blood sample. test (which come back at healthy levels).
At Haven Life, there are three life insurance health classes, and which one you are in will help determine your life insurance premium. Suffice it to say that improving your health can help lower your premium, but it’s often better to get insured now (and have coverage if something happens) and then wait for your health to improve.
In any case, your insurer will get a picture of your health through your application, by reviewing your health history and conducting a life insurance medical examination. The results will play a large role in determining your life insurance premium.
Another thing: You can get a policy without a medical exam, but doing so can result in a higher premium because your insurer knows less about you. (You may also be limited in how much coverage you can purchase, and know that the issuance and payment of the policy depends on your truthfulness when you apply for it.) Haven Simple is a no-medical exam life insurance policy, and you can get a free quote online today.
7. Smoking and tobacco use
This is related to health, but deserves its own section: Smoking and tobacco use can significantly affect life insurance premiums, as they are major risk factors for a range of health problems, including heart disease, lung cancer and stroke. If you use these products, expect to pay more for any life insurance you buy.
8. Other risk factors
Engaging in risky hobbies or activities can also affect the cost of life insurance premiums. Examples of risky hobbies or activities could be skydiving, diving, rock climbing, car racing or flying a private plane. If you engage in these types of activities, you may be charged higher premiums than someone who does not engage in these activities, as you are considered to be at a higher risk of injury or death.
If you work in a high-risk occupation, you may be charged higher premiums than someone who works in a lower-risk occupation. Examples of occupations that insurers consider to be exceptionally risky are law enforcement, aviation and construction.
What are some examples of life insurance rates?
To give you an idea of what life insurance can cost when comparing life insurance options, here are some sample prices of what people in excellent health might pay per month for Haven Term.
|Age||Sex||Police length||Coverage amount||Monthly premium|
|35||Woman||20 year||600,000 USD||$19.75|
|45||Woman||15 years||1,000,000 USD||$49.40|
|Estimates based on pricing for qualified Haven Term applicants in excellent health. Price differences will vary depending on age, state of health, coverage amount and term length. These rates do not reflect rates for applicants in DE, FL, ND, NY and SD.|
For an estimated price tailored to you, get a free quote online today.