Life insurance is a great way to protect your loved ones financially, but it’s also a major investment. Over a period of years, even a slightly lower premium can yield major savings. The following are some of the biggest factors that insurers consider when pricing out their policies.
Some of these criteria are outside your control, like your age, while others are things you can remedy with simple lifestyle choices, like losing weight and lowering your blood pressure.
- Life insurance can be financial help for your loved ones once you're gone, but it's a significant investment.
- Many factors contribute to how high your premium payment is and whether you qualify for discounts.
- Age is the most important factor in determining the cost, the younger you are, the lower your payments tend to be.
- Gender is also a crucial factor since women statistically live five years longer than men; as a result, insurance carriers typically offer women slightly lower premiums.
- Smoking, health, lifestyle, family medical history, and driving record are also considered by an insurance carrier.
Investopedia / Ellen Lindner
Not surprisingly, the number one factor behind life insurance premiums is the policyholder's age. If you’re young, the chances are that you’ll be paying the insurer for years before they ever have to worry about writing your family a check. Consequently, you’re better off taking out a policy before it’s too late. But that doesn’t mean you need insurance right after college if you don’t have any financial dependents.
Next to age, gender is the most significant determinant of pricing. Insurance carriers use statistical models to approximate how long someone with a specific profile will be around. The fact is that women, on average, live nearly five years longer than men. And because they’re usually paying premiums for a more extended period of time than males, they enjoy slightly lower rates. Sorry, guys.
Life insurance quotes are based on several factors, some of which may be beyond your control; when researching policies, consider the seven factors here and choose an insurer less likely to penalize those in your particular position.
Smoking puts you at a higher risk for all sorts of health ailments. So if you like to light up, it’s a red flag for insurance companies. In fact, it’s not uncommon for smokers to pay more than twice as much as non-smokers for comparable coverage. The effect on your pocketbook is another excellent reason to try and kick the habit.
The underwriting process for most carriers includes a medical exam in which the company records height and weight, blood pressure, cholesterol, and other vital metrics. They may also require an electrocardiogram (ECG or EKG) to check your heart in some cases. It’s important to get any serious conditions like high cholesterol and diabetes managed before searching for coverage to ensure a competitive rate. Some companies offer “no exam” policies, but you can expect to pay more.
Is your favorite pastime racing cars or climbing treacherous mountains? If so, you’ll probably have to shell out substantially more for insurance. Any time you engage in high-risk activities, there’s an increased likelihood that you’ll meet an early end—a big concern for carriers. Some companies also charge more if you have a relatively dangerous profession, such as mining, fishing, or transportation.
There’s not much you can do about your gene pool. However, a family history of stroke, cancer, or other serious medical conditions may predispose you to these ailments and higher rates. Carriers are usually interested in any conditions your parents or siblings have experienced, notably if they contributed to premature death. Some carriers emphasize your family’s health more than others, but it’s likely to have some impact on your premium.
It may come as a surprise, but many life insurance companies look at your driving record during the underwriting process. Whether or not they ask about violations on the application, they can access your records via the Department of Motor Vehicles to find out if you’ve run afoul of the traffic laws. Keep in mind that the last three to five years carry the most weight, so if you’ve improved your driving habits, you may benefit from a more favorable price.
Insurance companies base life insurance rates on several key factors. There are no one-cost-fits-all policies. Instead, insurers review factors like the policy's coverage amount, the type of policy as well as the age and other personal information about the policyholder when deciding a price. If you don't have life insurance but are considering getting a policy, take a look at these nine factors that can either raise or lower your rates.
Your age plays a big part in what you pay for life insurance, with younger policyholders paying lower premiums and vice versa. That's because statistically, the younger you are the more time you have to pay on your policy.
Past a certain age, often 75 or 80, you may find it challenging to find an insurer willing to offer you a life insurance policy at all, although each insurance company sets the maximum age to write a policy.
Life insurance provides essential protection for you and your family, regardless of how you identify. Life insurance premiums tend to be lower for females because their life expectancy (80.5 years) is longer than for males (75.1), according to a 2020 report by the CDC.
Most companies will offer life insurance to anyone, no matter their gender identity. Everyone fills out the same application and applies in the same way. But insurers may request additional documentation or information such as an explanation of your gender identity if you're transgender.
Before issuing a life insurance policy, your insurer may require a medical exam. If you have a history of medical conditions such as heart disease, high blood pressure, diabetes or cancer, your premium may be higher than for someone with a fairly clean health history. In the same way, if you have a disability that may shorten your lifespan or lead to serious complications in the future, your life insurance premium may be higher. If your condition is life threatening, an insurer may deny coverage altogether.
Your own health is one of the most important factors insurance companies consider when setting your premium. However, a pattern of severe illness or hereditary disease across several generations might also be a red flag to your insurer. For example, if your father, brother and uncle have all had prostate cancer, your insurer may require a more in-depth explanation of your family history when writing your policy (and hike your premium as a result).
A life less ordinary may lead to higher premiums for a life insurance policy. If you regularly partake in risky activities such as skydiving, race car driving and mountain climbing, insurers may consider their potential impact on your health and safety. For that reason, you could see higher premiums.
In the same way, smoking, heavy drinking and lack of self-care can impact how much you'll pay for a life insurance policy. However, if you make an effort to improve your health and well-being by making a sand castle instead of surfing, your insurance company may lower your rates down the road.
If you're in a high-risk career, such as firefighting or doing professional stunts, you might have a hard time finding an insurer who will write you a life insurance policy. If you do find one, you will likely pay a higher premium because your job may have an adverse impact on your health and safety. A few of the other jobs that insurers also consider risky include:
- Active service members
- Aircraft pilots
- Police officers
- Loggers
- Roofers and construction workers
- Steelworkers
- Farmers
- Miners
Insurers write different policies for individuals and groups, such as those provided by an employer. Your choice may come down to what you need and how much you can afford for the policy. Generally speaking, term life insurance is the most affordable, universal life costs more than term life and whole life insurance is the highest priced.
The main policy types for individuals include:
Term Life Insurance
Term life insurance lasts for a specific number of years. Your coverage ends at the end of this period and a payout only happens if you (or whoever is insured) dies during this time. If you outlive your policy, you may opt to renew, but your premiums may be higher than on your original policy.
There are two types of term life insurance:
- Level term: The death benefit stays the same throughout the policy.
- Decreasing term: Death benefits lessen over the term of the policy, usually in one-year increments.
Whole Life Insurance
Whole life insurance, also called permanent life or cash-value life insurance, covers you or another insured person for life, as long as you pay your premiums. Whole life insurance also builds cash value, which you may be able to withdraw under certain circumstances. For this reason, premiums for whole life may be higher than for term life.
Universal Life Insurance
Universal life insurance is another type of permanent insurance in which your death benefit is guaranteed and your premiums don't change. However, if you ever want to adjust your premium or death benefits, this type of policy is more flexible than some other types of coverage.
Life insurance helps take care of your family when you die. For that reason, you should probably purchase a policy that will cover your family's financial needs, especially if you are the sole breadwinner. Some financial advisors recommend a policy that's 20 to 30 times your annual salary.
When considering coverage amounts, look at how much you have in liquid assets after taxes. How much do you have in your savings or emergency accounts, what are your estimated Social Security benefits, and what other assets do you currently have at your disposal? You'll also want to consider your total monthly financial obligations, including your mortgage payments and credit card debt.
Some states let you factor in your credit when setting premiums using a credit-based insurance score. If you have good credit, you may pay a lower premium if you live in one of these states.
A credit-based insurance score isn't the same as the scores used by lenders (90% of top lenders use the FICO® Score☉ ), but they are based on similar information. The same steps you'd take to improve your FICO® Score, such as making payments on time and reducing your credit card balances, are also likely to have a positive effect on your credit-based insurance score.
The Bottom Line
Although no one can predict the future, it's comforting to know you have a life insurance policy in place to help care for the financial needs of your loved ones if something should happen to you. Because you can often save money on your premiums if you have good credit, you may want to check your credit score with Experian and see where you stand.