Life insurance premiums are affected by a number of distinct factors. Life insurance is a wager in which the insurance company offers a payout – the sum insured – for a premium – the wager – against death.
The rate or premium charged for life insurance will vary from one individual to the next. The reason is quite simple. Any factor that influences the risk to the insurer will result in a higher premium. In extreme cases, the insurer may even decline to offer insurance.
The risk of death increases as the age of the insured grows older. The assessment of this risk is based upon the mortality rates. The mortality rates are tables of the number of people per thousand that die each year in each age group. With few exceptions, the risk increases as a person grows older. A thirty year-old man has a very low probability of dying. That probability increases substantially when a person reaches forty or fifty.
Women live longer than men. It is therefore cheaper to provide life cover for a woman than for a man of the same age. Many life insurance companies assume that women will live about five years longer than men.
Smoking is one of the most serious health risks around. A smoker has a much higher risk of death in most age groups than a non-smoker. When a person is a smoker, the life insurance premium will be higher. Smoking is taken very seriously by life companies. A non-smoker that takes up smoking after taking out a policy must disclose this to the insurer or face repudiation of any claims.
Life companies that offer non-medical policies protect themselves by charging a higher premium. As a rule, the health record of the insured can change the level of the premium. A history of heart or lung disease, diabetes, kidney failure will lead to premium loadings by life companies. In some cases, the insurer could offer an exclusion for certain risks instead of a higher premium.
The health questionnaire part of the life insurance proposal is quite comprehensive. When large sums are at stake, the company will ask about weight, cholesterol levels and the health of parents and siblings as part of the underwriting process. Poor familial health could lead to the request for further investigation as well as for higher premiums.
Socio-economic class is an important consideration. Rich people live longer! Where you live could also affect your life expectancy and therefore your life insurance premium.
Occupation and Education
Some occupations are riskier than others. Few would be surprised that life in a military environment would be weighted. Many would be surprised that acting is considered to be a high risk profession! Hazardous occupations carry a high risk. Some life insurers will decline the insurance altogether, while others will offer insurance at a higher rate. Education is an important consideration when it comes to risk. Like socio-economic class, your risk reduces the higher your level of education. Someone with a post-graduate degree pays less for a life policy than someone with a high-school diploma.
The life insurance company
Each life insurer has its own ways of assessing risk. Some companies are happy with lower margins while others charge higher margins. The trend to sell directly to the public thus eliminating expensive commission charges may or may not lead to lower insurance rates.
The type of policy
A straight term insurance policy is the most cost-effective type of life insurance available. Once an ‘investment’ element has been added to the policy, it becomes much more expensive. Additional benefits such as disability and dread disease cover may also increase the cost of life insurance substantially. Before adding any of these benefits to a life policy, look carefully at what is actually covered. These benefits are typically sold at a higher margin than simple life cover. Furthermore, your understanding of disability may differ substantially with that of the insurer!
Life companies use actuaries to calculate the risks associated with a life policy. Actuaries include a whole range of variables to arrive at a life premium. Many people qualify for life insurance at standard rates, but it may be a good idea to shop around rather than accepting the first offer. Some actuaries may place greater importance on some facts than others while some companies simply charge more.