How Life Insurance Premiums are Calculated

Knowing how your life insurance premiums are calculated will help you make the right decisions when it comes to choosing a policy and coverage amount. In this post, we’ll give you a basic outline of the premium calculation process and what you can do to get the lowest premium.

Term vs. Whole Life

A major factor in your premium is the type of policy you buy. You’ve probably heard of term life, whole life, and universal life, which are three of the different types of life insurance. Each one has advantages and disadvantages; term is often a good option for individuals on a tight budget, because you can get more coverage for a lower cost. However, there are other important considerations when choosing a policy type, which you can read about here.

Factors That Determine Your Premium

When applying for life insurance, the insurer will determine your health status based on your age, gender and overall health. The underwriting department of the insurance company will use statistics and mathematical calculations to assess your risk. Since women statistically live longer than men, their premiums are lower. Plus, younger people have lower premiums because they typically have a longer period of time to pay their premiums and tend to have less health problems. Age is the primary factor in determining your premium amount, and the older you are, the higher your payment will be.

However, your lifestyle is also an important factor in calculating your premiums. Engaging in dangerous activities and having modifiable health issues (example: smoking-related asthma) will increase your premium. Smoking alone can increase your premiums by as much as 15 – 20%. Your job and your family’s medical history are also factors that can raise or lower your premium.

The Analysis

When applying for life insurance, you will be asked to provide information about your medical history and take a physical examination. If you are not completely truthful about your medical history, you may lose your policy or, when you die, your dependents may be denied death benefits. Therefore, it is imperative that you tell the truth throughout this process.

After your health, lifestyle, and other information (such as your credit history and your driving record) has been gathered, it is analyzed by an actuary, a statistician hired by the insurance company. Actuaries use tables called mortality and sickness tables to develop models that determine how likely it is that a particular person will get sick or die at a particular time. Based on this assessment, each person is assigned a specific premium amount.

The Medical Exam

There are policies available that do not require a medical exam. However, with most policies, a medical practitioner hired by the insurance company will come to your home to administer an exam. This person will check your weight, blood pressure and other vital signs. They may also take a blood and/or urine sample to test for signs of disease, your cholesterol level, presence of nicotine and a presence of illegal drugs. In rare cases, you may also need X-rays or an EKG. Your insurance premium will be partially determined by this assessment of your health.

Lowering your Premium

There are health factors that you can change to lower your premium. For instance, you could:

Stop smoking
Lose weight
Improve your cholesterol levels
Take medications regularly

If you have taken the steps to improve controllable health factors, such as quitting smoking, you may contact the insurance company and ask about lowering your premium.

You may also be able to save money by paying for your policy in one yearly payment vs. monthly installments. Sometimes, you can also save money as you approach coverage amounts in multiples of $250,000. This means that you could actually get more coverage (say, $250,000 vs. $240,000) for a lower premium.

It’s a good idea to meet with your agent yearly to review all of your policies, including your life insurance policy, and determine whether you need to make any changes. This includes discussing any factors that could lower your life insurance premium, such as a change in occupation or weight loss.