The life insurance industry is a complex one with plenty of moving parts. But underneath the microlevel details like costs, coverage, and eligibility, is the reality that life insurance is a business. Just like you pay premiums to carry insurance on your car or home, life insurance protects your beneficiaries after you’re gone.
If you’re curious about how life insurance premiums are determined, there are many factors to keep in mind – each affecting your costs in a unique way. Here is what you need to know about life insurance premiums and how they are calculated to find the best life insurance option for you!
Risks (Occupation and Hobbies)
Life insurance companies don’t want to raise their risk in taking you on as a client. Because of this, one area of your life they’re particularly concerned with is the risks of your day-to-day living. In some cases, that can simply mean your occupation.
So, for example, if you have a dangerous job that puts you at a higher risk of death, you can expect elevated life insurance premium costs. Examples of this might include first responders, underwater divers, welders, heavy-machinery operators, and similar career paths.
The risk analysis doesn’t stop there. Life insurance companies also analyze your personal hobbies. Examples of this can include casual weekend cliff jumping or being an avid rock climber from time to time. These activities aren’t as risk-free as, say, scrapbooking or knitting, which makes them a no-no in the eyes of most insurance companies. If an insurance company does decide to take you on despite these risks, you can expect to pay higher premiums.
Age and Health
Age and health are two huge factors in determining your cost and eligibility for obtaining a life insurance policy. Insurers determine your premium costs based on the risks you present regarding age and health, just as they do other factors.
If you’re an older person in poor health with risky lifestyle choices like smoking, you can expect a higher life insurance premium cost than a healthy, younger individual. Even if you have no glaring health issues, age increases your risk as you age. That’s because statistically, the older you get, the higher chance you have of dying.
Health can decline rapidly, especially in old age, which explains why health premiums are higher for older individuals. Because of this, it’s important to note that in cases of term life policies, you can expect your policy premium to go up for the same death benefit each time you renew.
How Much Coverage You Need
It only makes sense that your premium amount will range depending on how much coverage you need. If you’re looking to have $1,000,000 in coverage, that will look much different than someone looking for $200,000 in coverage.
Similarly, the type of coverage you opt for will also determine the price you have to pay in the end. Term life insurance policies are much more affordable than a whole policy that covers a person for life. Why? Because the risk is significantly reduced for life insurance companies when assigning term policies over whole life insurance policies.
The Bottom Line
Life insurance premiums can vary greatly depending on several factors. From things that a policyholder can alter, like risk factors of hobbies or health to a degree, to things that they cannot, like family medical history or age, all of these pieces work together to determine a person’s premium amount. Regardless, there are options to help lower the cost of insurance and make it affordable for your need.