How are life insurance costs determined?


Technically speaking, there are two core elements that constitute life insurance costs.

The first component, called the policy expense cost - is the sum of your share of insurance company expenses (i.e. agent commissions) and it usually remains relatively constant.

The other - more significant - life insurance cost element is the mortality cost which is determined by your odds of dying at the moment. As you age and your chances of dying increase, so does the mortality cost of life insurance.

Factors which Determine Life Insurance Premium Rates

To determine the mortality cost of each applicant and hence, the probability that they will have to pay policy proceeds, life insurance companies use actuarial statistics.

The rule is simple: the less likely the insurance company is to pay, the lower the premiums. Detailed personal information is gathered upfront in order to assess each individual applicant's risk. Here is a basic list of factors that determine insurance costs:

Age: In the case of purchasing term life insurance, the younger you are at the inception of the policy, the lower the premium rates. Life insurance costs go up proportionately as you age.

Sex: Women are privileged when it comes to buying life insurance as, statistically, their life expectancy is higher than that of men. Hence the lower life insurance costs for female customers.

Tobacco use: Smokers are more likely to die than non-smokers during the term of a policy, which explains why premium rates for smokers and other tobacco users are considerably high. Even if you are an ex-smoker, you will have to prove that you haven't used any nicotine-related products in the past year to qualify for the status of a nonsmoker. Insurers are very strict when it comes to determining the truth about your smoking status and they will ask you to prove it by taking a blood and urine test.

Weight: People whose weight is above the limits determined by the insurer, stand a higher risk of developing heart disease than average-build or slim individuals. For example, a 5'7'' woman must weigh a maximum of 176 pounds to qualify for the best available rates of a company, and a maximum of 192 lb to meet the requirements for the preferred rates.

State: Depending on the state, these are the external factors that can affect one's health, such as the risk of calamities, the quality of health care, etc.

Lifestyle: Any dangerous activities, hobbies, alcohol or substance abuse, and DUI or reckless driving can affect the mortality risk.

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