How Life Insurance Companies Calculate Your Rates

Learn which factors have the largest impact on life insurance premiums, along with ways to potentially lower your life insurance costs.

life insurance policy rate factors

Life insurance premium costs can vary wildly when looking at the total amount paid over a person’s lifetime. Life insurance policies can be an excellent way to prepare for one of the most financially-devastating situations possible. Knowing the factors that can influence your premium rates will potentially help you avoid heavy expenses.

Why Insurers Charge Different Amounts for Different People

Running an insurance company is not too different from bookmakers. They make a living by taking bets on sporting events like horse racing and boxing. Just like a “bookie,” insurers try to offset the risk of paying out on their policy. They do this by charging more for policies more likely to pay out. This is very similar to an odds or points spread on a sports bet.

Policyholders with a higher chance of receiving a claim payout will be charged more in an attempt to balance the insurance underwriter’s risk. Policyholders with a low chance of ever filing a claim will receive lower premiums. This is to encourage them to purchase a policy even if they may never need it. By charging more for high-risk clients and less for low-risk clients, insurance carriers can sustain income even if high-value policies are paying out regularly.

So, expect to pay more if your policy has a higher chance of actually paying out or if the payout is relatively large. Here are some of the most common elements that insurers look at when determining your premium rate:

#1 Age

For life insurance carriers, age will be the single-biggest determining factor for the client’s risk of receiving a payout. Younger clients are less likely to die across the board, even if they happen to have a severe health condition or a risky lifestyle.

Because of this correlation, your age will be the biggest factor in calculating your insurance premiums. CNN Money estimates that a 35-year-old will pay around 27 percent higher premiums than a 25-year-old.

#2 Gender

Males have a slightly shorter life expectancy than females — about five years less. A male policyholder is also more likely to encounter major health problems like heart disease, hypertension and malignant cancers. On top of that, males are statistically more likely to engage in risky behavior than women. But this particular element decreases as they age.

Bottom line: men pay around 38 percent more than women on average for life insurance policies.

#3 Smoking

Smoking tobacco can create a laundry list of health problems that affect every region and system of the body. Researchers have discovered that smoking can cause everything from lung cancer to heart attacks to stroke to hearing loss. These risks only increase as the policyholder ages.

Anyone who chooses to smoke habitually will be likely to have a decreased life span and present a bigger risk to the insurer. As a result, they'll almost always charge smokers 200 to 300 percent higher premiums than a similar non-smoker.

But if you quit smoking for at least two years, many insurers offer premiums almost as low as if you had never smoked. Just be sure to stay on the wagon. Policyholders may have their benefits revoked if they're discovered to have smoked recently prior to their death.

#4 Body Type and Weight

They say that looks could kill, but some insurers take that turn of phrase a bit too seriously. Depending on your body type, they may charge you more or less for your policy premiums.

Obesity will be the most impactful factor insurers look at when evaluating your health. Experts agree that high BMIs or body fat percentages can lead to a higher risk of conditions like heart disease, diabetes and even cancer.

Less common but still seen are insurers that use other physical factors as a way to adjust premium rates. Taller people can be said to have a greater risk of diabetes. Shorter people have higher incidence of heart disease, stroke or Alzheimer’s according to various studies. Even if there is not a thing wrong with you, the body you were born with can influence how much you're charged. These differences will vary by the U.S. state you live in as well as by the insurer.

#5 Other Health Conditions

Along with general body type, your current health status will be a major factor in how insurers perceive you as a risk. Chronic diseases like cancer, high blood pressure, heart murmur and diabetes will cause them to increase your rates. Insurers also consider recent health problems, hospital visits, and prescriptions. They do this decide if you have a higher incidence of acute problems that might indicate an underlying pattern of poor health.

People who suffer from chronic conditions can often take steps to reduce their incidence of medical interventions. This can demonstrate lower risk to insurers. Some insurers even offer no-exam policies that disregard health conditions entirely. But expect these to cost more across the board to make up the difference.

#6 Genetics

Even if you've never been to the hospital, your mom or grandpa’s poor health can be enough for insurers to worry. Genetic predispositions to issues like heart disease, cancer or even alcoholism can affect your insurer’s evaluation of your likelihood for encountering health problems. Shopping around can help you find a carrier that weighs family medical history less than others. But expect familial medical problems to have some influence on your premiums.

#7 Occupation

People with stressful or risky jobs are more likely to see a rapid deterioration in health, especially later in life. Anyone working as construction workers, loggers, fishermen or any of the other most dangerous jobs in America will find that they're charged higher rates. Factors like long-distance travel as part of your commute or day-to-day work increases your chances getting into an accident.

#8 Lifestyle

Insurers look at what you do during work as well as what you do after. If you like to golf on weekends, you're probably not going to be charged more for insurance coverage. 

However, if you prefer mountain climbing, scuba diving, skydiving or competitive martial arts, you may pay higher premiums. Providing certifications for safety and expertise can help. But if you race motorcycles in your spare time don't be shocked if your insurer charges you more.

#9 Driving Record

“Wait,” you think, “we aren’t talking about auto insurance here!” That may be true. But insurers can still scrutinize your driving record to make assumptions about your general risk aversion — or lack thereof. Someone with a good driving record or a few parking tickets won't be affected. But someone with moving violations will send red flags to insurers that they might put themselves in danger.

Keep a clean driving record for at least three years to see your insurance rates go down, both for life insurance and auto policies.

How Policy Type and Carrier Can Affect Your Premiums

Beyond life choices and health, the type of insurance provider you choose and the policy you hold with them can make a dramatic difference. One example is term life insurance versus permanent or whole life insurance. You can read about the differences between term and whole life insurance another one of our posts. But suffice it to say that term life is cheaper but expires. Permanent life insurance, on the other hand, will have higher premiums. But it has equity-type investment benefits based on the policy’s cash value.

Having another policy with the insurance carrier may lower your rates. So be sure to ask about bundling if you have a homeowners or auto insurance policy.

Finally, policy rates will vary greatly according to the insurance company you speak with. Some will push aside risk-assessment factors like height and weight whereas others will utilize them but may still have cheaper overall premiums.

Use QuoteWizard to find a life insurance policy with the coverage, terms and premiums that will work best for your individual needs.

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