What Factors Impact The Cost Of Your Life insurance Premium?
Because there is a high degree of variability in life insurance premiums even among people in the same age groups, it’s easy to get the impression that insurance providers come to arbitrary decisions about what rate to offer their customers.
Insurers, however, base their rates on an insurance score, which means that age is neither the only nor the main component in their premium calculations. And the good news is that while you can’t change your age, you can take some steps to improving your insurance score.
While several of the factors that influence your score are beyond your control, there are some that you can address to lower your score and, consequently, lower your premium. This article will discuss some key features that influence your insurance score and how you can take steps to improve it.
What Are Life Insurance Premiums?
It’s important to remember that the sale of life insurance is a business. And, like all businesses, there are many factors that need to be considered to be profitable. Companies have to make sure that they can pay their bills, understand risks and still make a profit.
In the case of life insurance, we can think of “the bills” as death claims that have now become due and payable. The risks would be factors such as age, gender, smoking, health, lifestyle and family history. Unfortunately, like most businesses, these are just the known and common risk factors. Often there are other factors, such as financial markets, inflation or an unforeseen pandemic that also can impact costs and profitability. Here’s are a few examples of life insurance premiums in various cities and states:
- The average monthly cost of life insurance in Massachusetts is $9.40 for a 31-year-old female for $250,000 of life insurance coverage.
- A 30-year-old man can get a 10-year term life insurance policy in San Diego worth $1 million for around $20 per month.
- A life insurance policy in Dallas with standard coverage of $250K costs an average of $18 for men and $16 for women.
How Is My Life Insurance Premium Calculated?
The insurance score is comprised of a myriad of factors that affect the likelihood of a policyholder’s beneficiaries filing a claim. These include age, gender, physical condition, personal habits, personal medical history, family medical history, and occupation.
These combined factors are then offset against the possibility of defaulting on insurance premiums. Some life insurance companies introduce other factors such as policyholder credit history, but we will limit the focus of this article to the base factors used by all insurers.
Gender
Gender may seem to be an odd consideration when calculating life insurance premiums, but global statistics show that women outlive men by an average of five years. This means that insurance providers are less likely to be able to collect premiums from men for a longer period. So, men pay higher insurance premiums than women of the same age for the same coverage.
Physical Condition
With regard to physical condition, insurance providers consider a variety of statistics. Most base their evaluation on the Body Mass Index (BMI), or the ratio of an individual’s weight to their height. People who register as overweight or obese on the BMI are charged higher premiums because these physical conditions are associated with a greater number of health risks.
Policyholders who are overweight commonly ask later in life why they are still paying a low premium. It is likely due to the fact that their BMI score was lower when their insurance provider last examined them. If they were to submit themselves to further examination or request an upgrade to the terms of their coverage, they would likely be charged a higher premium rate.
Personal Habits
Personal habits such as smoking, alcoholism, and substance abuse elevate the risk of premature death and, hence, increase the risk of insuring a policyholder with these habits. Insurance companies typically require full disclosure of such habits during the initial client interview.
It isn’t just addicts or risk takers who pay more for their insurance; the negligent pay higher premiums as well. Life insurance companies typically charge people who neglect their health through binge eating or lack of exercise significantly more for coverage.
Medical History
Insurance companies consider both personal and family medical history in computing an individual’s insurance score. Family medical history is relevant insofar as it may reveal the likelihood of a congenital disease that may have been transferred genetically but has so far remained largely undetected.
Some people, then, are destined never to have favorable insurance rates. If you are born into a family with a history of heart disease and diabetes, you will always be given poorer rates than someone with the same health record but with less family history of hereditary conditions.
It might be tempting for applicants to lie about their medical history in the hopes of obtaining lower rates. However, openly disclosing any relevant details of your personal or family medical history is prudent, especially since insurers have teams of employees and legal representatives working to verify the information you provided in your initial interview.
Concealing material information, or material misrepresentation, is grounds for reducing or denying an insurance benefit, and there is no point in purchasing life insurance only to leave your beneficiaries unable to collect the death benefit because you concealed your medical history.
Occupation
Aspiring policyholders whose work in professions that endanger their life, such as firemen, rescue workers, or seamen, have to pay higher premiums. The day-to-day risks involved in hazardous employment is a factor insurance providers are highly vigilant about.
It’s not uncommon for life insurance policies to include a clause that mandates the policyholder to inform the provider of any change in occupation that will expose them to a greater risk of death.
This overarching clause aims to encapsulate all hazardous professions and ensure that the insurance provider has the opportunity to charge an additional premium if the risk of insuring the policyholder increases. As with medical history, failure to inform the insurance company may result in the invalidation of the policy.
Getting Your Insurance Score Reassessed
If you have been assessed with high insurance policy premiums, there is still hope. Many insurance companies have procedures for reassessment that simply involve subjecting yourself to the same set of tests given to new applicants. If the test results show that the risks present during your initial assessment are no longer present, many insurance companies will reduce your premium rate to maintain a good rapport with you and avoid losing your business to a rival company.
Keep in mind that life insurance policies are founded on trust. The insurance company’s rigorous assessments are merely a way of ensuring a long-term relationship with you and your family. Building trust with your insurance provider can reap rewards not only for yourself but also for your beneficiaries and descendants, who will have more favorable transactions with the insurance company.
Is My Premium Affected by Financial Markets?
When the insurance company collects your premium, they set the money aside to earn a return on the investment. These funds continue to grow every year you don’t have a claim.
If the insurance company pays out less in claims and expenses than what they collected, they will be profitable that year. In years when the financial market return is good, they will make more money and be more profitable.
Unfortunately, the opposite is also true. For example, if the insurance company’s actuaries review the financial markets one year and predict a higher return, they may charge minimal premiums that year for new policies.
If by the end of the year they see a drop in markets and generate less return than anticipated, it could cause them to review their results and change the premium they charge going forward on the same policies.
Why Are Some Premiums Cheaper Than Others?
When it comes to pricing and premiums, it’s important that you are always comparing apple to apples, or insurance coverage to insurance coverage in this case. Often, each company has a few minor differences in what they are offering, which can easily justify a price difference. With that being said, the biggest factors that account for equivalent policies being priced differently are claims history and their target markets.
If, for some reason, a company has a larger number of claims in a group that they had not anticipated, they would need to have an adjustment in premiums to offset the increase in claims paid out. Often you may see that only certain groups have higher premiums when compared across multiple life insurers.
Insurance companies do not have a standard price that goes up by age only but often have a target market that they want to be competitive in. This means the secret to getting the best deal or lowest premium is finding the insurance company that is most interested in insuring you. Often you can see by marketing or sales strategy who a company’s target market might be.
Depending on the company’s strategy and target market, what might be good for one person may not be the best deal for the next. Here is an example to illustrate this; the monthly cost of life insurance in Georgia is $61 for $1,000,000 (20-year term life insurance) vs the monthly cost of life insurance in New Jersey, New York, and Ohio is $25 for $1 million (10-year term life insurance).
Conclusion
It’s important to remember that like anything, insurance companies are basing the pricing or premium on many factors outside your control. In many cases, these factors have much more to do with business strategy, claims history, and economics than your lifestyle choices. It’s always best to shop around and make sure that you understand what you are purchasing paying for when it comes to insurance.
