The Expert's Guide to Understanding How Your Life Insurance Premium is Calculated

by Miranda Marquit

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Image source: lululemon athletica

When it comes determining your life insurance premium, a number of factors are taken into account. Indeed, number crunchers working for the life insurance company, called actuaries, spend their time figuring out how different factors lead to possible mortality, helping to set your life insurance premium, based on information from others in similar groups to you. The law of large numbers helps insurance companies figure out when you are likely to die, and this forms the basis of what you pay for life insurance coverage.

When a life insurance company calculates your premium, it is done in a manner that reduces the chance of loss for the company upon your eventual demise. When you pass on, the company has to pay the agreed upon amount you have insured your life for. If insurance companies paid out benefits, without making any money, they would soon be out of business. So, you pay premiums to help cover the costs.

Your life insurance company takes the money you pay in premiums, and uses it to earn interest by putting it into an interest-bearing account, or investing it (usually in a fund). The longer you pay premiums, and the longer the money is available to work on the behalf of the insurance company, the more likely it is that paying your death benefit will not mean a loss for the company.

When Will You Die?

As you can see, determining when you are likely to die is of utmost importance to a life insurance company. If your risk profile says that you will die soon, your life insurance premiums will be higher so that company gets as much as possible before your death. A lower risk profile, though, results in lower premiums, since the life insurance company has a greater chance to cover the cost of the benefit before you die.

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Image source: lululemon athletica

Some of the factors that the insurance company considers when making a determination of how many years you are likely to live include:

  • Age: The older you are, the more likely you are to die in a short period of time, so younger applicants usually see lower premiums, since they have decades longer to make premium payments.
  • Health: Your health plays a role in your life insurance premium. Many insurers require at least a basic exam that includes taking your height and weight, as well as a blood sample and a urine sample. Insurers check for cholesterol levels, evidence of drug use and consider whether or not you are obese. Your current health habits, including smoking and alcohol consumption, are also considered. Those whose health profiles put them at risk for life-threatening and chronic diseases are likely to see higher premiums, even if they are relatively young.
  • Family Health History: You may also need to share information about your family's health history. If you have a history of heart disease in your family, and you are overweight with high cholesterol, that combination could mean higher premiums, since there is an increased chance that you will die prematurely. A close family history of chronic and life-threatening illness can also raise red flags - especially if your current health habits are questionable.
  • Biological Sex: Even your gender matters when it comes to determining life insurance premiums. Statistically, women live longer than men. So, women pay lower life insurance premiums since it's assumed that they will live a few more years than a man can be expected to live.
  • Your Job: Your job can provide a clue to your expected mortality as well. Some jobs are rather dangerous. Life insurance companies consider law enforcement, firefighting, truck driving, and construction to be among the most dangerous jobs. These jobs can put you in dangerous - and sometimes life-threatening - situations. Even jobs that entail foreign travel (especially to countries with high crime rates, or countries at odds with the U.S.) can be considered a higher risk of death. As a result, if you do these jobs, your life insurance premium could be higher, even if you are young and currently healthy.
  • Your Hobby: Other lifestyle decisions also carry weight with life insurance companies. Those interested in BASE jumping, mountain climbing, skydiving, and scuba diving should be aware that these hobbies are considered dangerous. Insurers might also look at whether or not you own a motorcycle. This could represent a larger risk of death, and your life insurance premium is likely to be adjusted accordingly.
  • Type of Insurance: If you plan to get a policy that builds cash value, you will pay more in premiums. This is because you are benefitting from the investments that the insurance company is making with your premium money. Whole life insurance, which does not expire, costs more as well, since the insurance policy is not for a fixed term. Term life comes with lower premiums, since once the fixed term is up, the company keeps all of what you paid in premiums - but isn't on the hook for paying a death benefit. The shorter your term, the lower your term life premium, since there is a better chance you will outlive your coverage.
  • Reason for Insurance: Why you are getting life insurance is another consideration, since it has bearing on when you expect to die. If you are suddenly getting life insurance because of a new job you are undertaking, that could mean higher rates. However, if you are young and interested in obtaining life insurance as part of family protection, you usually have access to the lower premium rates.
  • Income: Your income can be used to help the insurance company determine whether or not you are over-insuring yourself. Many insurance companies believe that those who are over-insured present a larger risk of loss. Too much insurance can be a red flag that the insured knows something about the future, or it can provide a temptation.

There are a number of factors that life insurance companies take into account when assessing you as a risk. These factors subtly affect your premium amount, and can make a difference between getting the best life insurance rate, and getting stuck with a higher rate.

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