How is life insurance priced?

So you are looking at policies… and wondering how life insurance is priced. Let’s talk about the different factors that can affect your life insurance rate. If you’re young and healthy, life insurance is probably more affordable than you think.

Coverage amount

Your coverage amount (or death benefit) is the amount of money your beneficiaries will receive tax free if you die. As you can imagine, the higher your coverage amount is, the higher your insurance premiums will be. In fact, they go up proportionally: the more money you want your beneficiaries to get, the more money you have to put in.

Example: All else being equal, a $250,000 death benefit would cost you $24.77 per month whereas a $500,000 death benefit would cost you $39.63 per month.

Policy type

The type of policy you have will have a significant impact on your premiums.

First, term life insurance is the most affordable form of life insurance. This is because it pays your death benefit only if you die during the fixed term of the policy, which is usually set at 10, 20, or 30 years. Permanent life insurance, on the other hand, is more expensive because it guarantees the payment of your benefit no matter when you die.

​Second, for term policies, a shorter term results in a cheaper premium. Why? Because you’re paying for coverage during the years that carry a lower risk of death. For example, the probability of dying between ages 30 and 40 is less than the probability of dying between ages 40 and 50. As coverage is expanded into the later years of your life, your cost of insurance increases.

​Example: All else being equal, a $250,000 20-year term policy would cost you $24.77 per month whereas a $250,000 30-year term policy would cost you $41.02 per month.

Age

​Your age also plays a big factor in your life insurance rate. It’s no secret that the older you get, the higher your chance of dying is. If you’re younger, it’s less likely that your insurance company will have to pay out your death benefit anytime soon. Because of this lower risk of death, younger people have lower insurance rates.

​Example: All else being equal, a $250,000 20-year term policy would cost a 35 year old $24.77 per month whereas the same policy would cost a 45 year old $55.20 per month.

​Gender

​Believe it or not, gender is also a big factor in your life insurance rate. Why? Men and woman have different life expectancies, and insurers take this into account when pricing life insurance policies.

​According to data from the U.S. Census Bureau, a female born in 2010 is expected to live for 81.4 years whereas a male born in 2010 is expected to live for 75.6 years. Because women are expected to live longer, they have a lower probability of dying at younger ages. As a result, women typically have lower life insurance rates.

​Example: All else being equal, a $250,000 20-year term policy would cost a 35-year-old male $24.77 per month whereas the same policy would cost a 35-year-old female $19.56 per month.

Smoking history

​As you probably guessed, smoking plays a huge role in life insurance rates. To put it simply, people who smoke have a higher health risk and, therefore, a greater chance of dying at a younger age. Insurers take this into account when pricing policies.

​Example: All else being equal, a $250,000 20-year term policy would cost a 35-year-old male nonsmoker $24.77 per month whereas the same policy would cost a 35-year-old male smoker $55.46 per month.

​Health

​Like your smoking history, your health tends to be an important factor in your insurance rate. Insurers are pretty comprehensive when it comes to assessing your health. They’ll ask you about everything from asthma to Alzheimer’s. (You can count on them being very thorough here.) 

Each of these illnesses has different implications for your life expectancy, and each one gets factored into your life insurance rate.

Example: All else being equal, a $250,000 20-year term policy would cost a 35-year-old “standard” (average health) male nonsmoker $24.77 per month whereas the same policy would cost a 35-year-old “preferred” (very healthy) male nonsmoker $18.88 per month. 

How we help you make the right choice

As you can see, when it comes to life insurance rates, there are some factors that you can’t change. What is in your control? Your coverage amount and policy type. This is where we can help.

​Our easy-to-use life insurance checkup helps you identify your objectives by looking at all the personal factors unique to you and your family. Our proprietary algorithms then take care of the rest. They analyze your partner’s income, family savings, and family spending habits to calculate the death benefit and policy type that match your objectives. Your loved ones are counting on you, so let us help you get it right.

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