Life Insurance Premiums – What Factors Affect Rates?

Life Insurance RatesWhole life insurance premiums are the payments policyholders make to the insurance company for their policy. Although the rates of some types of term life insurance increase over time, the cost of whole life insurance is fixed at the time it is issued and remains the same over the lifetime of the insured person. This initial premium is higher than term coverage, but many financial experts estimate that, over a lifetime of continuous protection, term and whole are comparable.

How Pricing Is Calculated

Life insurance rates are determined by risk factors such as the age, health, medical history, occupation, and lifestyle of the applicant. The company estimates how long the premiums will be paid based on the average life expectancy of the insured person’s risk profile, for example, 30-year old, Caucasian males with average height/weight proportions and no pre-existing conditions or illnesses in their family medical history.

Other factors that may increase your cost of life insurance include tobacco use, alcohol abuse, obesity, a family history of cancer, heart disease or diabetes, and/or a dangerous job or hobby. Premiums for a healthy 35 year-old are significantly lower than for a 40 year-old since a 35-year-old offers a higher statistical probability of paying premiums for the next 30 years.

Cost of Term Life

Term life insurance rates are also based on all the previously discussed risk factors. Term life coverage is temporary and no death benefit is paid if the insured person survives the term period, which can be 1, 5, 10, 15, 20, 25, or 30 years. If a policyholder buys a 30-year term policy at the age of 20, the company determines the odds that the person will die before the contract expires.

Unlike whole life insurance premiums, which are based on guaranteed payment of the death benefit, term rates are based on the possibility that the individual will die during the term and the death benefit will have to be paid. This is the primary reason term premiums are much cheaper than whole premiums when applicants are young.

Life Insurance Cash Value

Part of each payment for whole life coverage is diverted into a savings feature called the cash value. The insurer guarantees the rate of interest paid on this savings feature and the policyholder can access the money during their lifetime. Term life does not accrue cash value, and the insurer keeps all the premiums if the policyholder survives the policy term. When comparing whole versus term life insurance, consumers should consider that whole life returns part of the premiums to the policyholder and subtracts that payout from the lifetime cost of each type of coverage. Life insurance experts and financial advisers both agree that, on average, the total cost of term (when renewed throughout your life) and whole life insurance is comparable.

Long Term Life Insurance Costs

Although term life insurance is initially cheaper, the rates increase substantially each time a term policy is renewed or replaced, while whole life premiums remain level over the policyholder’s entire life. A 30-year-old will pay higher rates for whole life than term, but at age 60, the same policyholder’s whole rates are usually very similar to the cost of a new term policy.

Saving Money

The best way to get the cheapest life insurance is to buy a policy as young as possible. Since young policyholders can reasonably be expected to outlive a term policy and pay for a longer time period, companies charge lower premiums. The best rates go to non-smokers of healthy height/weight proportions who lead a healthy, active lifestyle and do not regularly partake is dangerous sports or hobbies. Statistically, these individuals have the longest life expectancy. Nonetheless, each company calculates premiums and risk different, so comparing life insurance quotes online from multiple carriers is the only way to thoroughly research the industry and find the lowest prices.

Buying The Right Amount of Life Insurance

Since financial circumstances and needs change over a lifetime, it can be difficult to decide on the right amount of life insurance coverage. Some financial experts try to simplify the process by suggesting a death benefit equal to some multiple of the applicant’s income. This method does not adequately estimate life insurance needs based on your individual circumstances. For example, a couple with 2 children and a mortgage making $100,000 per year needs significantly higher coverage than a couple with no kids or mortgage making $100,000. The income-multiple model would suggest the same amount of life insurance for both couples. Instead, you must calculate you specific needs based on categories such as final expenses, mortgage payments, living expenses, tuition/education costs, etc.

When determining how much life insurance you want to buy, keep in mind your current financial situation – assets and liabilities, such as your savings and checking accounts, investments, retirement accounts and pensions versus your mortgage, credit card bills, medical expenses, and children’s education.

Policyholders can use inexpensive term life policies to supplement their permanent coverage during times when additional coverage is needed. This strategy can help keep costs low, since policyholders do not have to pay for more coverage than they actually need and term life coverage can expire when it is no longer needed.

Comparison Shopping

Like any other purchase, consumers should always compare policies, premiums and companies side by side to find the best value. Remember, quality trumps all in financial decisions so the lowest rate doesn’t mean the best deal.

Author Bio: Gary Dek writes about life insurance policies, rates, and insurance companies at By providing the best, unbiased life insurance information on the internet, I want to help you make the right financial decisions for your family. Gary has a degree in financial analysis and valuation, and was previously an investment banker and private equity analyst.

Photo Courtesy of Style Germs

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Leave a Comment:

DC @ Young Adult Money says November 27

This is definitely a valuable post for me because I’m going to be purchasing life insurance at the beginning of 2014. I’m looking forward to comparing different plans and seeing what makes the most sense for my financial situation.

FI Pilgrim says November 27

I bought life insurance a few years ago and I’m glad I did. The premiums are so cheap when you’re young, and it’s a great way to provide security to my wife and two kids.

Dee @ Color Me Frugal says November 28

Great info. We purchased life insurance a few years ago and we are really glad that we did. It really helps having the peace of mind to know that if anything happened there is insurance in place. Having both life insurance and disability insurance helps us sleep better at night!

Rebecca Williams says March 27

There are several factors which affect our life insurance premiums. Taking out cover for life insurance is very important but sometimes it can be confusing. There are two reasonable choices- long term and short term life insurance plans and both of them have their own advantages and disadvantages. However, the right policy depends on your personal requirements and financial status. My advice would be to shop around but always ensure to read the policy conditions to be certain you have the correct cover.

Sean Dudayev says August 16

I think the most important thing for consumers to keep in mind is that its a must to work with an experienced agent that can put you with the company and policy that fits your specific needs.

Ganeshkumar says September 12

This is a great article and very comprehensive. I completely agree on the point of “Buying the right amount of insurance”. It is often found that people are under insured and they arent even aware of that. Their peace of mind is that they have a life insurance policy. Sometimes, customers do not have money to buy the right amount of premium and settle down for the next best alternative. Sometimes, it is the agent’s lack of knowledge which doesn’t help customers make the right choice.

eric van haaften says December 17

Great coverage of the entire life insurance process. I just stumbled upon this post when reading a few of your other posts on investment topics. Very well designed and comprehensive blog too.

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