Life insurance premiums seem abstract and arbitrary to many shoppers.
This sense of mystery can be frustrating because your premiums connect directly to reality, specifically the reality of paying for your coverage each and every month.
Learning how life insurance companies build your premiums can give you more control over the buying process and remove a lot of the mystery.
The Components Of A Life Insurance Premium (Price)
You probably know what goes into the price of an automobile. Costs for raw materials, research and development, manufacturing, freight charges, extra features, and sales commissions are all part of the recipe.
Though your life insurance policy doesn’t take up space in the driveway, its cost — also known as its premium — has components you can consider and sometimes even control.
These main components include:
The life insurance underwriters’ main goal will be to assess the level of risk your policy would pose for the insurance company.
If the worst happened and you died within a few months of taking out your policy, the company would lose a significant amount of money.
This happens from time to time because life is unpredictable. Insurers understand this. But they also understand a close analysis of your health can help them make educated predictions about your future.
So they usually require you to take a medical exam including lab draws, a weight check, and a blood pressure reading.
The results of this test will determine whether you get coverage and how much you’ll pay in return.
What Can You Do?
If your health could use some improvement, take a year or so to improve your diet, get some regular exercise, and improve your cholesterol and blood pressure readings before you apply for coverage.
If you need coverage sooner and are in poorer health, consider a no exam policy or ask an independent agent for help finding an insurance company whose underwriters could classify you more favorably.
Work And Hobbies
The kind of work you do can impact your premiums. Firefighters and prison guards face more daily risks than preschool teachers and office managers. Underwriters will calculate these risks into your premiums.
They’ll also consider how you spend your free time. If you climb mountains and hope to tackle El Capitan or Mount Everest next summer, underwriters will take note. You will pay a higher premium than someone who knits or writes poetry on weekends.
What Can You Do?
Short of changing your lifestyle, which we don’t recommend, there’s not much room for improvement here. You can, however, check with an independent insurance agency like ours about best insurance companies for people with riskier hobbies.
Your Credit Score
Lower credit scores can mean higher life insurance premiums, and it’s not because underwriters think you won’t pay your premiums on time.
Researchers have found a correlation between lower credit scores and higher likelihoods of paying claims on a policy.
What can you do?
This one’s pretty obvious. If your credit score could use some improvement, make a point of paying your bills on time and keeping your loans in good standing.
Your Age (Primary Factor)
Naturally, your age will impact your premiums because older people are statistically more likely to die sooner.
The youngest and most healthy people can find the lowest premiums.
Life insurance for millennials will always be cheaper than for someone in their 40s, and someone in their 40s will pay less than someone in their 50s.
Every year you get older, your rates will go up if you don’t already have a policy!
- Too expensive
- Impossible to get due to health
What Can You Do?
You can’t make yourself younger, but you can get your coverage sooner. As you age, you’ll start to lose access to the premiums you’d qualify for now.
Since your premiums should remain the same throughout your policy, you can save a lot by locking in low rates while you’re young.
Life Insurance Rates By Age
Because this is one of the biggest factors, and also one of the ones you have absolutely no control over, we’re going to dive deeper into why life insurance rates are so strictly by scheduled by age, and what you can do to take advantage of your current age to save money.
The older you are, the more you’re going to pay for life insurance; there are no exceptions.
There are no other factors of life insurance pricing which are so abundantly clear. Life insurance actuaries can, quite simply, increase costs of coverage based on age.
If you’re a male, a female, young or old, there’s one thing you have in common with everyone else around you: you’re all growing older.
Life insurance actuaries have taken this into account, based on large amounts of data and statistics, because, on the whole, they know exactly how long a person is going to live with great certainty.
This the primary piece to pricing life insurance, bar none!
If you already have a policy, did you know you can ask for a re-evaluation?
This is one primary way for you to take advantage of your old age, in a sense, without having to get a new policy at your new, older age.
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More Factors Affecting Your Premium
Not all components of your premium are as personal as your weight, your hobbies, and your credit history.
But they will still have a huge impact on how much you’ll pay for coverage.
Type Of Insurance
Life insurance comes in many different forms. Some policy types require higher premiums:
- Term life insurance: If there’s a “basic” kind of life insurance, it may be term life. You buy a specific amount of coverage for a set amount of time, or a term. Terms usually come in 10, 15, 20, or 30 years. People who are young and healthy can get a lot of coverage for a smaller amount of money with a term life policy.
- Whole life insurance: Unlike term life, whole life lasts the rest of your life. Since it doesn’t expire, it usually costs more. Also, along with paying for coverage, you’re also funding a cash account with your regular premiums. This added cash value builds over time and you can use it in a variety of ways.
- Universal life insurance: Universal life is permanent like whole life, but its cash value component will be invested in more elaborate ways. Depending on how well the investment grows, you could use the value to lower your premiums compared to a traditional, or level, whole life policy.
- No exam life insurance: People with health problems, and shoppers who are afraid of needles or in need of coverage right away, like no exam life insurance. You can find no exam coverage in a term or whole policy. If you’re in good health, you would pay lower premiums and unlock larger coverage amounts by getting a medical exam.
What Can You Do?
Determine exactly what kind of insurance you need.
If you just need coverage and not an investment component, stick with a term policy and its lower premiums. If you’re in good health, use that to your advantage by getting a medical exam.
Amount Of Coverage
This one should be a no-brainer, but it can also be easy to forget: The more coverage you buy the more you’ll pay in premiums.
A $1 million policy will require higher premiums than a $250,000 policy. With a term policy, a longer term will also raise your premiums.
What Can You Do?
Calculate your needs and don’t overdo your coverage level. If you need only $500,000, getting $1 million will raise your premiums unnecessarily.
An insurance needs calculator online can help. If you expect the kids to be financially independent within 20 years, you could save with a 20-year instead of a 30-year term.
Insurance companies offer add-ons, called riders, to make your coverage more flexible. Riders also add to your premiums. Common riders include:
- Accidental Death: Also known as double indemnity, this rider can double your death benefit if you die because of an accident.
- Waiver of Premium: A policyholder who becomes disabled and can’t afford to pay the policy’s premiums could keep the coverage in place with this rider.
- Accelerated Benefit: A terminal diagnosis or other qualifying conditions can allow policyholders to claim part of their death benefit while still alive.
- Child Term: You could designate a portion of your coverage for payout if your child dies.
- Return of Premium: This rider allows policyholders to reclaim all of their paid premiums after their term policy expires.
This list offers only a sampling of available riders you could add to your policy. Each rider, of course, will make your premium more expensive.
What Can You Do?
To limit costs, be sure you’re getting only the riders you really need and anticipate using. Statistically speaking, you will never use very many riders.
Also, read the fine print to find out exactly how and when you could take advantage of a rider.
With an accidental death rider, for example, find out how your insurer defines “accident” and how they’d determine whether your death resulted from the accident.
Insurance Company Rates
Insurance companies with comparable products often have similar rates. Still, by comparing quotes and company rates, you can save money on premiums. Even a difference of a dollar or two can translate into noticeable savings over the life of a policy.
The key here is to make sure you’re not sacrificing quality.
Insurance rating agencies like A.M. Best and Moody’s give insurance companies grades, usually ranging from A (or A+ or A++) on down to Cs and Ds. The higher the rating, the better the quality of coverage you’re buying.
What Can You Do?
Shop around and check with the rating agencies before buying coverage.
If you have a special medical condition like diabetes, a heart valve disorder or have a family history of certain conditions, check with an independent insurance agent about which companies can offer you the best rates.
By paying annually instead of monthly or by bundling your life policy with other kinds of insurance, you could get discounts on your premiums.
What Can You Do?
Ask your insurance agent about available discounts, but don’t sacrifice quality in search of a discount. Bundled policy discounts can lead consumers into lower quality coverage.
Also, keep in mind a quote does not necessarily match your premium. Quotes can give you an idea about your premiums, but you’ll have to go through the underwriting process to actually set your premiums.
Underwriters could discover something the company didn’t know when it quoted your rate.
Putting It All Together As A Premium
You can’t control every component of your premium. Health conditions and dangerous occupations are facts of life and they impact rates.
If you’d like to save money on premiums or maximize the amount of coverage you can buy, you can help yourself by controlling the components you can control: your general health, your credit score, the timing of your purchase, and your coverage choices.
With insurance, knowledge goes a long way.
Your own knowledge and the knowledge of an independent insurance agent who knows the nuances of dozens of insurance companies.
Let us know how we can help.