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The Biggest Factors That Determine The Cost Of Life Insurance Premiums

Insurance 101, Life Insurance, Lifestyle · June 12, 2020

When you buy a life insurance policy, you are taking part in sharing the risk of death among a large group of people. You are sharing the likelihood of an incurred loss with many other people who are in a similar risk pool and are also paying premiums to the same insurance company. 

Risk Categories That Insurance Companies Use

Since life insurance companies are looking to stay profitable, they need to charge enough to subsidize the cost of death payouts, administrative expenses, and still have a profit afterwards. This is why the insurance companies have developed a category rating system that outlines the overall process and how they determine who pays what. Click here to learn more about life insurance risk class ratings and where you may be classified.  

The basic procedure is calculating the risk of each individual who is a prospective client and determining what their premium will be . While the life insurance companies do not know precisely when a particular individual will pass away, they have access to large amounts of data, statistics, and information to make the best prediction that will create a win-win situation for themselves as well as the client.

3 Main factors that determine the cost of life insurance

Your Age – Younger people are considered a lower risk, as it is assumed they are in better health and will be active in the workforce. 

Your Gender – Generally women pay less for coverage because they typically live longer than men.

Your Tobacco Use – Those who smoke or have smoked for a long period of time will more than likely have higher premiums as they are more likely to develop serious health conditions before they pass. 

Medical history, criminal background, and other things to consider

Medical history of the individual who is applying

All medications being taken and for how long

Results from any physical or medical exams

The health history of the individual’s family 

The individual’s criminal history 

Dangerous occupations, activities, or hobbies

How long a person has gone without seeing a doctor

Surgeries or major medical procedures 

The insurance companies have a large amount of information focused on helping them answer these 2 questions: 

How likely is the proposed insured to die? 

When is the proposed insured likely to die? 

By answering these 2 basic questions, they will be able to determine the risk, assess the potential chances of loss and get a fair rate based on each person’s unique situation and health status.

Filed Under: Insurance 101, Life Insurance, Lifestyle Tagged With: age, criminal background, family sickness, gender, life insurance cost, life insurance health ratings, life insurance risk categories, medical history, risk sharing, tobacco usage

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