Setting of life insurance policy premiums can be a complicated process which involves multiple factors. Since no two individuals are the same, they are bound to have differing financial and life situations. As a result, their policy premiums will also differ, based on a variety of factors. If you are looking to gain a better understanding of the life insurance process, starting with the premium setting process, also known as the underwriting process, is a good place to start. Here is a brief list of some of the most important factors which are taken into consideration by insurers when they decide premiums for your life insurance policy.
Applicant’s age
Your age is one of the biggest determinants of your insurance plan premiums. Experts suggest that the best time to buy insurance is while you are young. This is because, younger age is associated with lesser health-related risks, hence lowering the risk associated with the applicant.
Current state of health
The applicant’s medical state at the time of applying for the policy is also of great importance in the underwriting process. Insurers will typically have the applicant undergo a medical test to determine their current medical state. If the person has any critical or serious illness or condition, that will result in higher premiums, or may even result in a rejection of the application. Healthier individuals may get the benefit of lowered premiums.
Applicant’s medical history
Your past medical record is also of significance in the underwriting process, and can affect premium rates. If an individual has had an adverse medical history plagued by recurring illnesses or a critical disease, they may be charged higher premiums, given the higher risk. Someone who has had a relatively smooth medical history, is at a greater benefit of availing lower premiums.
Occupation
Certain occupations are considered riskier than others, which in turn, drives up the risk factor for the insurer. For instance, if you are a fisherman, miner, adventure sports instructor, etc., you may even be denied cover by an insurer due to the high degree of risk involved. Occupations which are sedentary in nature like desk jobs, involve much lower risk, hence give the applicant the benefit of availing lower premiums.
Smoking/Consumption of alcohol
The health hazards of smoking/alcohol consumption are not unknown and can lead to complicated, life-threatening medical problems. Therefore, insurers charge higher premiums from applicants who are smokers or heavy alcohol consumers. On an average, smokers may be quoted life insurance premium rates that are almost double of what non-smokers are quoted. However, if you have quit, you can contest for a revision of the underwriting process and try for lower premiums.
Gender
That women live longer than men, is not unknown either. As a result, insurers will typically offer lower premium rates to women, as compared to men.
Lifestyle activities
Are you someone who loves indulging in adventure sports like paragliding, scuba diving, or bungee-jumping? Because if you do, then your chances of getting life insurance may be low to nil, as insurers associate these activities with high risk. Insurers who do happen to provide cover, may charge high premiums.
Driving history
Your driving history also plays a major role in the underwriting process. If you hold a record of being a safe driver, chances are that you may be offered some discount on your life plan premiums. However, if you have a driving record which is full of parking tickets, or speeding tickets, that will only drive up your premiums.
Criminal record
This is a no-brainer. Those who have a criminal record, or are on probation, will flat out be denied cover by an insurance company.
Term of your policy
The longer the duration of your life insurance policy, the higher will be your total outflow of premiums. This is simply because, the shorter the term, the lower will be the risk of death. It is more likely for one to die during a 30-year policy term, as compared to a 10-year policy term.
Family’s medical history
When it comes to offering cover, insurers want to be thorough in terms of the risk they have to cover. Therefore, your family’s medical history also comes into play in the underwriting process. If anyone in your family has suffered or is suffering from a serious illness, then you are automatically at risk of contracting it, therefore driving up your risk.
Insurance companies base life insurance rates on several key factors. There are no one-cost-fits-all policies. Instead, insurers review factors like the policy's coverage amount, the type of policy as well as the age and other personal information about the policyholder when deciding a price. If you don't have life insurance but are considering getting a policy, take a look at these nine factors that can either raise or lower your rates.
1. Age
Your age plays a big part in what you pay for life insurance, with younger policyholders paying lower premiums and vice versa. That's because statistically, the younger you are the more time you have to pay on your policy.
Past a certain age, often 75 or 80, you may find it challenging to find an insurer willing to offer you a life insurance policy at all, although each insurance company sets the maximum age to write a policy.
2. Gender
Life insurance provides essential protection for you and your family, regardless of how you identify. Life insurance premiums tend to be lower for females because their life expectancy [80.5 years] is longer than for males [75.1], according to a 2020 report by the CDC.
Most companies will offer life insurance to anyone, no matter their gender identity. Everyone fills out the same application and applies in the same way. But insurers may request additional documentation or information such as an explanation of your gender identity if you're transgender.
3. Health
Before issuing a life insurance policy, your insurer may require a medical exam. If you have a history of medical conditions such as heart disease, high blood pressure, diabetes or cancer, your premium may be higher than for someone with a fairly clean health history. In the same way, if you have a disability that may shorten your lifespan or lead to serious complications in the future, your life insurance premium may be higher. If your condition is life threatening, an insurer may deny coverage altogether.
4. Family Medical History
Your own health is one of the most important factors insurance companies consider when setting your premium. However, a pattern of severe illness or hereditary disease across several generations might also be a red flag to your insurer. For example, if your father, brother and uncle have all had prostate cancer, your insurer may require a more in-depth explanation of your family history when writing your policy [and hike your premium as a result].
5. Lifestyle
A life less ordinary may lead to higher premiums for a life insurance policy. If you regularly partake in risky activities such as skydiving, race car driving and mountain climbing, insurers may consider their potential impact on your health and safety. For that reason, you could see higher premiums.
In the same way, smoking, heavy drinking and lack of self-care can impact how much you'll pay for a life insurance policy. However, if you make an effort to improve your health and well-being by making a sand castle instead of surfing, your insurance company may lower your rates down the road.
6. Occupation
If you're in a high-risk career, such as firefighting or doing professional stunts, you might have a hard time finding an insurer who will write you a life insurance policy. If you do find one, you will likely pay a higher premium because your job may have an adverse impact on your health and safety. A few of the other jobs that insurers also consider risky include:
- Active service members
- Aircraft pilots
- Police officers
- Loggers
- Roofers and construction workers
- Steelworkers
- Farmers
- Miners
7. Policy Type
Insurers write different policies for individuals and groups, such as those provided by an employer. Your choice may come down to what you need and how much you can afford for the policy. Generally speaking, term life insurance is the most affordable, universal life costs more than term life and whole life insurance is the highest priced.
The main policy types for individuals include:
Term Life Insurance
Term life insurance lasts for a specific number of years. Your coverage ends at the end of this period and a payout only happens if you [or whoever is insured] dies during this time. If you outlive your policy, you may opt to renew, but your premiums may be higher than on your original policy.
There are two types of term life insurance:
- Level term: The death benefit stays the same throughout the policy.
- Decreasing term: Death benefits lessen over the term of the policy, usually in one-year increments.
Whole Life Insurance
Whole life insurance, also called permanent life or cash-value life insurance, covers you or another insured person for life, as long as you pay your premiums. Whole life insurance also builds cash value, which you may be able to withdraw under certain circumstances. For this reason, premiums for whole life may be higher than for term life.
Universal Life Insurance
Universal life insurance is another type of permanent insurance in which your death benefit is guaranteed and your premiums don't change. However, if you ever want to adjust your premium or death benefits, this type of policy is more flexible than some other types of coverage.
8. Coverage Amount
Life insurance helps take care of your family when you die. For that reason, you should probably purchase a policy that will cover your family's financial needs, especially if you are the sole breadwinner. Some financial advisors recommend a policy that's 20 to 30 times your annual salary.
When considering coverage amounts, look at how much you have in liquid assets after taxes. How much do you have in your savings or emergency accounts, what are your estimated Social Security benefits, and what other assets do you currently have at your disposal? You'll also want to consider your total monthly financial obligations, including your mortgage payments and credit card debt.
9. Your Credit
Some states let you factor in your credit when setting premiums using a credit-based insurance score. If you have good credit, you may pay a lower premium if you live in one of these states.
A credit-based insurance score isn't the same as the scores used by lenders [90% of top lenders use the FICO® Score☉ ], but they are based on similar information. The same steps you'd take to improve your FICO® Score, such as making payments on time and reducing your credit card balances, are also likely to have a positive effect on your credit-based insurance score.
The Bottom Line
Although no one can predict the future, it's comforting to know you have a life insurance policy in place to help care for the financial needs of your loved ones if something should happen to you. Because you can often save money on your premiums if you have good credit, you may want to check your credit score with Experian and see where you stand.