Understanding Life Insurance Premiums Is Important
Life insurance premiums rise as a big issue when you seek to enroll yourself on a policy. The reasons are obvious: premiums vary greatly and there is no pricing system known to you.
But the issue is important because the idea of how premiums work can help you find insurance at lower costs.
What Is Life Insurance Premium?
Premiums are the most important component of life insurance. It is comparable to what you call ‘price’ in everyday life when you buy commodities. Through premiums you provide costs for the promised death benefit that the insurer is obliged to provide to your nominees (when you pass on) as per the stipulations go.
How Is Premium Calculated
Life insurance companies determine premiums in tune with their underwriting principles. These principles are ideally prepared on the basis of data and statistics that point to the buyer’s expected longevity. The underwriter, who determines your premiums, takes into consideration the possibilities of paying the death benefit and charges you accordingly. The riskier you appear to the underwriter, the higher your premiums of life insurance policy will be.
Premiums of Term Life Insurance
Term life insurance, the insurance that promises protection for a certain period, is often said to be the true insurance. As insurance is theoretically supposed to work, term life insurance is aimed at providing death benefit to your heirs when you pass on. Usually, insurers do not provide you term protection during the late years. They want to stay sure that the possibilities of paying death the benefit to your beneficiaries are the least. In other words, insurers offer you protection when they make sure you are a safe bet.
As insurers deal with safe customers, they do not need to charge you high premiums. They know they will not require to pay death benefit to most of the customers’ heirs. Estimates go that insurers pay death benefits to only 7% of their term insurance customers.
As a result, life insurance premiums for term policies are typically small-size. For example, monthly premiums for a healthiest 25 years old male’s 10-year term policy for $500,000 is $13. 64 from AAA, $13.76 from Protective and $14.19 from American General.
Premiums of Whole Life Insurance
Whole life insurance stands in contrast with term insurance. Besides the till-death insurance, it also works as an investment mechanism. The death benefit comes to the beneficiaries no matter when you die.
While a very scanty number of term insurance nominees get the benefit, the opposite happens when you buy whole life insurance. Insurers have to pay death benefit to 100% of the policyholders or their beneficiaries. They also add an interest to your money.
So, whole life insurance premiums are quite expensive. For example, the same 25 years old youth’s premiums for whole insurance worth $500,000 would cost $376 a month from Foresters and $406 from Assurity.
Life Insurance Premiums Determiners
While determining your life insurance premiums, the underwriter will collect and check a series of information about you.
These are the commonest factors that he will be focusing on while determining your life insurance premiums:
How much your life insurance premiums will be largely depends on what age you are. As a rule of thumb, the older you grow, the higher your premiums will be. Each year of your life counts in determining your life insurance premiums.
According to World Life Expectancy average longevity for both males and females in the USA is 78.86 years. For males, it is 76.30 years while for females it is 81.30. Besides, males are more into smoking or alcoholism than females. As a result, males pay more for their life insurance premiums than women do.
Your Personal Health
Your personal health reports play a crucial role in the fixing of your life insurance premiums. Traditionally, you are required to undergo physical exams for life insurance. Besides, insurers will also want to know about your health history. They will also check back your information from the Medical Information Bureau.
Any abnormalities in your health status like elevated blood pressure or even chronic back pain will raise your premium.
Your Family Health History
Besides an applicant’s personal health, history of family health also comes to the scence in the determining of life insurance premiums. Genetically-inheritable health issues can be a cause for raising the cost of your life insurance. If you have instances of diabetes, elevated blood pressure or blood cancer in the family history, your life insurance premiums will go up. Neurological and psychiatric histories will also raise your insurance premium.
Your habits are a catalyst for your life insurance premiums. If you smoke, your premiums will skyrocket. This habit will be responsible for multiplying your life insurance premiums several times than your counterparts’ who are not into smoking.
This happens because smoking is the number one cause of death that can be averted. Center for Disease Control and Prevention (CDC) which is a government platform states that smoking is directly or indirectly responsible for more than 480,000 annual deaths in the USA. CDC also says that life expectancy for smokers is 10 years shorter than that of a non-smoker.
National Institute on Alcohol Abuse and Alcoholism (NIAAA) says, 88,000 people die of alcohol abuse in the USA every year. It is the third largest cause for pre-mature deaths in the country.
As a result, if the underwriter finds you are an alcohol taker, the rate will go high for you.
Hobbies also are a role-player behind life insurance premiums. But that depends on the nature of your hobby. If you practice any of the deadly hobbies that involve risks of death, your premiums will go high.
So, hobbies like bungee jumping, scuba diving, mountaineering, sky diving, ski diving, motorbike racing, cliff jumping and the like will raise your premiums.
What you do for a living can either raise or lower your life insurance premiums. If you are in a profession that involves mishaps that may cause death, you will end up paying high costs for your insurance. For example, people like fire-fighters, special unit policemen or overseas fishermen will find their life insurance premiums to be higher than those who do jobs without risks.
Even some works (like farming) which you usually think to be risk-free may be a cause for higher life insurance premiums for you.
Your location has much to do when it comes to life insurance premiums. If you reside in an uncertain climate that often face disasters, your insurance will be costly.
You can easily guess why so happens. If you live in Missouri, or Kentucky or Texas, you know how volatile the weather can be in these places and the inherent risks they bear . So, a resident of New York and New Jersey is likely to pay smaller premiums for life insurance in comparison to one living in any of the said states.
Besides, life expectancy in the state you live can be a determiner for your life insurance premiums. For example, Hawaiian people have the highest life expectancy of 81.30 years while Mississippi has the lowest longevity of 74.96. Premiums for life insurance in the two states will inevitably vary.
Driving is another big factor that influences your life insurance premiums. When you have had tickets in the recent past your life insurance premiums will be high.
Coverage and Duration
As you already have known, the premiums for term insurance policy will be way more inexpensive than that of whole insurance. Typically, the longer your protection, the bigger the premiums. Also, as a matter of fact, the bigger the coverage, the bigger the premium. While 10 and 15 years terms are comparatively cheap, premiums for 20, 25 and 30-year terms tend to be more expensive. For example, for a 30-years-old fittest man, the cost of $500,000 for 10 years is $13 a month for 10 years, $15 a month for 15 years, $20 for 20 years, $26 for 25 years and $32 for 30 years.
Type of the Policy
While coverage is a big factor, the type of the policy you choose also factors in insurance premiums. The premiums of a level term insurance policy will be the same throughout the term or duration of the policy. But if you buy non-level term insurance, the premiums will go up gradually. Similarly, return of premium term insurance will cost more than level term insurance but remain same throughout.
How you want to pay your premiums plays a role in determining your life insurance premiums. If you choose to pay your premiums annually, your premiums will come lower than when you choose to pay each month. It so happens because it lessens the company’s management loads and they get the money at a time.
Company Fees and Charges
Life insurance companies levy different fees and charges for maintaining your policy. Rules in this regard vary between companies. Depending on how many and how much fees an insurer charges you, your premiums may be comparatively high or low.
A Piece of Advice
While some of the determiners of life insurance premiums are beyond your hand, some others are really within your catch. For example, you cannot change your gender but you can surely try to keep your driving records clean. Similarly, you can perhaps quit smoking or alcohol.
But easier, we know, said than done.
Should you then hide some facts?
No, two types of people should never be lied to: doctors and insurers. If you lie to your doctor, it is you who will suffer. But if you lie to the insurer, your beloved ones will suffer in the long run. Because the cat sometimes comes out in the end and if so happens you will be held responsible for intentional misstatement. Paying higher life insurance premiums for their sake may sometimes be the best decision you should take.