How Are Life Insurance Premiums Calculated?

How Are Life Insurance Premiums Calculated?
Fiona Staff6/11/2021

Life insurance is arguably one of the most worthwhile expenses when it comes to providing financial protection to those you love. But it is exactly that: an expense.

The amount you’ll pay for your life insurance coverage depends on a number of key factors, some of which are within your control while others are not. Here’s a look at the top things that contribute most to your life insurance premiums, and how you can best reduce the cost of coverage while still protecting your family and assets.

Things You Can’t Control

There are a few personal factors that affect your life insurance costs, which you aren’t able to do much about. 

Your Age

The simple truth is that the older you are when you purchase (or renew) life insurance coverage, the more it’s going to cost you. Why? Well, the older you are, the lower your remaining life expectancy, meaning that you are a bigger risk to your life insurance carrier.

This is why you should consider buying life insurance as early as possible, and buying a policy that will last as long as you need it to. (link: text: Buying coverage in your 30s) is considerably less expensive than buying in your 50s or 60s, for instance, and many carriers even have age limits for purchasing certain policies. 

Your Gender

Men and women have different life expectancies and pose unique levels of risk to an insurance carrier. For that reason, men and women will generally pay a different price for the same level of coverage. In fact, men will pay an average of 20% more for coverage when compared to a woman of the exact same age and health.

The older you are when buying a new policy, the bigger this difference in premiums may be between males and females. 

*Being non-binary or transgender does not alone preclude you from buying life insurance coverage. Just note that your potential carrier will usually want to know your assigned gender at birth, rather than your stated gender, and will use this for underwriting purposes.

Your Health and Medical History

Unfortunately, we don’t have much control over the cards we are dealt in life, especially when it comes to hereditary health concerns, medical conditions, family health history, and even injuries or illnesses. These can all affect life insurance underwriting, and will often impact the cost of your new policy. 

In some cases, you may even be denied coverage if the condition is severe enough or not controlled. For example, if you have been in remission for a while, you can typically buy a policy with standard underwriting even as a cancer survivor; if you’re still being actively treated for cancer, though, or have a poor prognosis, you may be limited to final expense or guaranteed issue coverage.

There is one caveat to this aspect of your premiums, which you probably can control to some extent: your weight and general level of health. By losing a few pounds, lowering your cholesterol (perhaps with a healthy diet), and/or reducing your blood pressure (with diet, exercise, or even stress control), you may be able to impact your paramedical exam results and, in turn, lower your premiums a bit. 

Things You Can Control

While you can’t really change your age or medical history, there are (luckily) many factors that are within your control.

Your Tobacco Use

Put simply, smokers will pay more for life insurance coverage than non-smokers. This underwriting factor generally applies to all forms of tobacco use, too, so applicants who vape or use chewing tobacco will also feel the effects. Some carriers won’t even offer a policy to tobacco users, in fact, and most will test for nicotine as part of a standard life insurance medical exam.

The good news is that if you quit using tobacco, you can begin to qualify for lower insurance rates again after 12 months of being tobacco-free. And the longer it’s been since you’ve used tobacco, the better your underwriting category will be.  After 5 years tobacco-free, you are viewed the same as someone who has never used tobacco.

Drugs and alcohol may also fall into this category, as many carriers take excessive drinking and recreational drug use into account. This typically includes marijuana, too, even in states where consumption is legal.

Your Hobbies

There’s nothing wrong with pushing the limits a bit… unless, of course, you want the lowest life insurance premiums possible.

Certain occupations and hobbies can affect the cost of your coverage, especially if they are very risky in nature. You may have trouble finding an affordable policy if, say, you’re a stunt pilot or lion tamer. You may also see your premiums rise if you do things like skydive, BASE jump, SCUBA dive beyond a certain depth, drive race cars, or rock climb. 

When applying for life insurance coverage, expect to be asked about your risky hobbies, how often you participate in them, and whether you have any upcoming plans for travel out of the country or to engage in some of these activities. 

The Type of Policy You Buy

Ok, enough about you. Let’s talk about the policy you’re trying to buy and how that affects your cost, in and of itself.

Dollar for dollar in coverage, whole life insurance is about five times more expensive than term life insurance, on average. So if you are looking to protect your family with a permanent policy, it’s going to cost significantly more than buying the same amount of coverage for a predetermined number of years. 

Of course, this peace of mind may be well-worth the added expense, just know what to expect as you go into the policy-shopping process, whether you opt for term or whole life insurance in the end.

How Much Coverage You Want

The last — and perhaps the most obvious — factor that goes into your life insurance premiums is simply how much coverage you need. The more life insurance you buy, the more you can expect to pay. 

With that said, bumping your coverage up by thousands, or even tens of thousands, of dollars can often come at a minimal difference in price. It’s worth it to shop around a bit among different carriers and see what rates you’re offered for different levels of protection; you might be surprised to see what you can actually afford!

Buying life insurance is an important step toward protecting those you love most. However, it’s also important to know when to buy, how much you can expect to pay, and how you can reduce your premiums as much as possible in the process. After all, the lower your life insurance costs, the more affordable coverage you can buy for your family. 

If you’re shopping around for life insurance coverage, Fiona — in partnership with Leap Life — can help link you with a variety of trusted carriers. They offer an easy and comprehensive way to get matched with personalized life insurance policy quotes from trusted, A-rated (or higher) carriers, whether you’re buying your first policy or just want to see what kind of coverage you can afford.

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