What is the Cost of Life Insurance?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 16, 2021

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You will need to get an idea of what goes into life insurance rates before you buy a policy. Doing a life insurance premium payment calculation will give you a sense of what you can expect to pay, which allows you to consider your budget in the decision about what coverage to buy.

Life Insurance Premium Calculation

Insurance companies need to make money, so they have to consider several business-related factors when they set life insurance rates:

  1. Mortality cost— the cost of paying claims to the beneficiaries of insured people. Mortality costs for most insurance companies have declined in recent years because people in the United States have been living longer. This provides a longer period to collect premiums while death claims are being paid out later than originally anticipated. Still, companies try to select new policyholders who are basically healthy, and they charge life insurance rates that reflect the actual mortality risks of people who have serious health problems or engage in potentially dangerous activities. Otherwise, costs for death claims might be higher than expected costs, which could cause financial difficulties and drive up overall life insurance rates.’
  2. Operational cost— the cost of operating the insurance company and selling its products. These include marketing costs (commissions-costs of operating sales office, advertising expenses, etc.), and non-marketing costs (the cost of constructing and maintaining company buildings, salaries of officers and staff, etc.).’
  3. The return on investments (ROI)— Insurance companies invest money until they need it to pay claims or expenses. If they can earn good investment returns, this will help to pay some of their expenses and reduce or maintain the rates for life insurance. Companies will then be able to sell policies at lower premiums and compete more effectively against other companies.

The overall effect of all these factors determines how much the company needs to charge in order to provide life coverage and still make a profit and pay dividends to its policyholders.

More on Mortality Cost

Mortality cost is the biggest factor in your premium rates, and will be calculated by evaluating you to determine your risk of dying during the policy. Your life insurance company will consider the following:

  • Health: Poor health raises the rates for life insurance because it decreases the number of years you are likely to pay premiums and reduces the time before the company may have to pay a claim. Whether or not you are a smoker, drink excessively, or are overweight contribute to your health. Being unhealthy can place you in a high risk life insurance class, which will make it difficult to find an affordable plan.’
  • Age: As much as you do not like to think about it, the older you get, the greater your chance of dying. Therefore age affects the cost of life insurance. Your chances of obtaining the best life insurance rates are when you are young. Therefore, it makes sense to purchase life insurance while you are young.’
  • Gender: Males usually cost more than females. On average, females live longer. Let’s remember, life insurance premium calculations are determined by actuaries (mathematicians) who look at pass history of claims and mortality statistics. This being the case, a rate is calculated for that, on average, females live longer, thus receive a lower rate.’
  • Job: A dangerous job makes it more likely that you will die before the policy is paid off.’
  • Hobbies: Likewise, dangerous hobbies will raise red flags among insurance companies and cause an increase in your cost of life insurance.’
  • Travel: Traveling outside the United States can expose you to certain risks. Depending on your destination, you could be subject to diseases, water or food borne illnesses, or war. Therefore, most life insurance applications will ask about your travel plans. Answering these questions truthfully is best. The insurance company could refuse to pay your death claim in the event you should die while in another country and it was determined that your plans to travel were in place when you applied for insurance but were not disclosed.

The mortality cost is a morbid, but necessary calculation for life insurance companies to make before they can determine the price of a policy. Mortality cost is more important than any other factor in life insurance underwriting, but it is something you can work on by living healthy, quitting smoking, and avoiding dangerous hobbies.

TIP: If you are considered to be a high life insurance risk, you need to get several life insurance quotes in order to find a policy that you can afford. Click here to get started with a Free Advice quote today.

Price Variation Between Term and Permanent Life

Term life and permanent life insurance have a vast price different. Your term life insurance premium will not last for the rest of your life, and will not contribute to any long term savings or investment account. Permanent life insurance premiums, on the other hand, stay constant throughout your life and will create a cash value build up. As a result, term life insurance rates are typically much lower than a premium plan that offers the same death benefits.

Life Insurance Rate Categories

Insurance companies generally divide customers up into four risk groups: preferred, standard, substandard, or uninsurable.

  • Preferred – You are a low risk. You are not sick, don’t have a high-risk job or hobby, and have a clean bill of health. You pay a lower premium.’
  • Standard – You are an average risk. You may have had some health issues in the past, but don’t have a terminal illness or a high-risk job or hobby. You pay an average premium rate for persons with similar risks.’
  • Substandard – You have a high-risk job, such as a pilot, scaffold worker or diver; or you have a chronic illness like diabetes, heart disease or high blood pressure. You pay a higher premium.’
  • Uninsurable – You have a terminal illness. You will not likely find an insurer to sell you a policy. You are a high risk.

Note that one company’s category for you may not be the same as another company’s, so it still pays to shop for insurance with different companies even though one may have labeled you substandard. If you have or have had an illness or health condition, you should work with a professional who will obtain quotes from many different insurance companies. An insurance broker can do this for you.

  • EXAMPLE: A person who is 25 years old, healthy and with no family history of genetic or terminal illness could be rated in preferred category and receive the best rate on life insurance for term or whole life. However, a 45-year old who is healthy and has the same no family history of genetic or terminal illness would pay a higher premium simply because of the age difference. This may be harsh, but the insurance company’s aim is to collect more premiums in the fewer years the 45-year old has left. This is particularly true for permanent policies with a certain pay out. While someone 25 can die suddenly as well, insurance actuaries have determined the exact amount to charge for life insurance rates for each category and age group in order for the company to make money. These rates adjust all the time, so you can wait for a better premium, but remember that waiting only makes you older!

The price of life insurance can vary depending on a number of factors that are designed to predict whether or not the insurance company will make money with you as a customer. Obtaining a life insurance premium calculation before you purchase will go a long way towards helping you find the coverage that you need considering your budget. Once you have an idea of what you will pay, shop and compare quotes to get the best price. For a free, no obligation life insurance quote, click here to take advantage of the Free Advice quote center.

Read more articles about finding the right life insurance policy by clicking here.

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