If you happen to observe several people sign up for their respective personal life insurance, you may notice that the rate or price being offered for each package varies considerably from one person to another.
For example, you may find that non-smokers tend to have lower rates than those who smoke regularly. Similarly, those with existing health conditions often struggle to find insurance packages with low rates especially if their illness or disorder is severe.
Further, insurance premiums may also vary depending on the plan holder’s age. You may be looking for a definitive answer for the phenomena mentioned above.
Yet while it does seem simple at first glance, life insurance has fairly complex mechanisms that play a key role in determining the final insurance rate a person will have to pay in their own insurance policy.
Read on to learn more.
How Does Life Insurance Work
Life insurance is designed to provide financial help to individuals named as the beneficiaries of an insurance account holder in the event that they pass away. This ‘financial help’ is called the death benefit and beneficiaries receive it from the insurance company.
However, the money paid to the surviving family members doesn’t grow on trees. Rather, it comes from the regular payments insurance holders as you remit to the company in the form of life insurance rates or premiums. These amounts are paid either on a monthly, quarterly, or annual basis.
For instance, if you purchase an insurance plan with a coverage term of 20 years and a death benefit of USD$500,000, you may have to pay a premium of USD$20 that can go as high as USD$250 every month.
Now, if you do the calculations, you’ll find that you’re essentially paying much less compared to what your beneficiaries are poised to receive.
Looping back to the previous example, throughout the entirety of the term, you’ll only end up paying only USD$4,800 up to USD$60,000 in exchange for the half a million guaranteed death benefit payoff.
Insurers end up only receiving a tiny fraction of the death benefit payment they promise to their customers. So, how do insurance companies make economic sense out of the situation?
For starters, when an insured individual is still alive after the term has already passed, the life insurance company gets to keep the money the account holder has paid over the course of the term.
For that reason, many life insurance companies tend to ensure people that are less likely to pass away in the near future. They do this by lowering the monthly payment for healthy people as a way to encourage them to sign up and avail themselves of insurance packages.
On the other side of the coin, they tend to increase the rates for non-healthy people and the elderly to discourage them from purchasing insurance plans.
It’s believed that life insurance rates tend to vary from person to person. But how do companies calculate life insurance rates?
Risk Class And Life Insurance Rates
Risk class plays a considerable part when calculating an individual’s life insurance rate. It refers to a group of people with similar characteristics in regards to the risk of influencing a coverage.
In the case of life insurance, a risk class is used to group people according to their risk of passing away in a prescribed period of time.
For example, smokers make up one class, while non-smokers are in a separate risk class. Of course, there are other factors that affect risk class such as the following:
- Age;
- Gender;
- Overall Health;
- Family history;
- Occupation; and
- Hobbies.
Companies calculate life insurance rates depending on which risk class the individual belongs to. They may use the factors mentioned above to group individuals into different risk classes.
Here’s a closer look at different risk class groups that tend to have higher life insurance rates than others:
- Older people and senior citizens;
- Disabilities;
- People with existing medical conditions;
- People with risky hobbies like parachuting, skiing, gliding, and the like; and
- People with dangerous occupations like roofers, pilots, loggers, and many more.
Insurance companies often call the risk class of the groups mentioned above as ‘Standard.’
On the other side of the spectrum are groups of people that enjoy relatively low life insurance rates. These may include:
- Women;
- Adults in their 20s or early 30s;
- People with excellent health; and
- People with an office job.
Companies call the risk class groups mentioned above as ‘Preferred Plus’ or ‘Super Preferred.’ It’s believed that many life insurance companies tend to be highly flexible when catering to individuals that fall under the mentioned risk class.
One of their most common tactics is offering lower life insurance rates to entice them in buying insurance products.
Among the stated factors above, age is perhaps one of the most influential aspects insurers will take into consideration when calculating the life insurance rate of a prospective insurance customer. If you want to know the average rate on different age groups, you can look at this term life insurance rate chart by age.
The Relationship Between Insurance Rate And Age
Why life insurance gets more expensive as you age? As you may have already guessed, the correlation between insurance rate and a person’s age is directly proportional. The lower your age is, the lower the life insurance rate and vice versa.
The reason for this is simple—for every birthday you celebrate on Earth, you move one step closer to your life expectancy which many life insurance companies want to avoid.
So, how exactly does the insurance rate relate to age?
Although there have been several speculations about the calculation, it’s important to remember that each insurance company has varying methodologies in coming up with its own computations.
Nevertheless, experts suggest that life insurance rates per age may increase by 8% to 12% for every year a non-insurance holder ages older.
For instance, if a 30-year-old person with excellent health purchases a 30-year term life insurance package with a USD$1,000,000 death benefit, they may have to pay USD$500 every month to a given insurance company.
Yet that amount may increase unless they lock in on an insurance package jumping to USD$540 once they turn 31 years old, USD$583.20 after another year, and USD$629.85 after one more year, and so on.
With the abovementioned pieces of information, now you might be wondering: ‘Does the insurance rate when you first apply for the coverage remain the same throughout the term, or does it increase as you grow older?’
To answer that question, you must first understand that there are two types of life insurance.
Term Life Insurance Vs. Whole Life Insurance
When you purchase life insurance from any insurance company, you can usually choose from one of two options or packages, namely term life insurance, and whole life insurance.
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Term Life Insurance
As the name implies, term life insurance implies that the beneficiary will receive the death benefit if the insured passes away while the term is active.
If not, then the rates or premiums the insured has paid will remain in the company’s possession. Coverage terms usually range from 10 years, 20 years, and 30 years, although some companies offer long terms like 35 or 45 years.
If you’re insured in a term life insurance, the rate or premium that is established the year when you bought the package remains the same throughout the entire coverage term.
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Whole Life Insurance
Whole life insurance packages last forever, which means even if 60 years have passed, the beneficiary can still receive the death benefit when the insured passes away.
Apart from the death benefit, individuals insured in a whole life insurance package can also save up the money they have paid as a savings component.
If you’re signed up with this type of insurance, this may allow you to maximize the amount of money your beneficiary will receive. In exchange, this option usually has higher premiums or rates as opposed to term life insurance packages.
With whole life insurance products, the package premium or rate rises every year according to your health and age, further increasing the amount of money you have to pay every given period.
Take note that regardless of the type of package you plan to purchase, you’re not always guaranteed to qualify for life insurance. In some cases, companies may deny your application based on their own discretion.
This especially holds true for those that aren’t in the ‘Preferred’ risk class of life insurance companies.
Life Insurance Coverage Qualification Per Age
When you apply for life insurance, the company has a set of legal rights to deny you the privilege of purchasing life insurance. It’s a relatively rare occurrence yet it still happens in some cases.
Let’s you’re already 70 years old; you may not qualify for any life insurance package by any insurer out there. If they don’t outright deny your application, insurance businesses may try asking for more requirements from you than other applicants.
For example, they may require you to undergo in-depth health-related testing.
Nonetheless, life insurance companies may become more lenient with their screening processes for younger would-be insurance policyholders. In short, the younger you are, the easier you can qualify for most life insurance packages.
If you’re older, you might struggle to find a suitable life insurance company that’d grant your request for insurance coverage. But take note that there are several things you can do to turn the tides in your favor.
Minimizing Life Insurance Rates
By now, you should know that apart from age, there are other factors that affect the life insurance rate of companies such as your overall health, occupation, and hobbies. What do these have to do with minimizing insurance rates?
While most individuals simply accept the insurance rate companies offer, it’s possible to manipulate or alter them.
For example, with the right exercise, you can improve your body mass index or BMI which would reflect positively on your overall health. This will, in turn, increase your chances of getting approved for considerably lower life insurance rates.
Similarly, if you transition from a risky occupation to an office job, the likelihood of you passing away soon decreases that may lead to insurance companies offering you lower rates.
With the abovementioned tips, you should be able to minimize the premiums or rates for your package.
Final Words
Purchasing life insurance is one of the most important decisions one can make in the entirety of their lives. Unfortunately, finding a suitable package can be pretty tricky, especially if you’re already in your late 40s or even older.
As explained in the article above, most insurance rates or costs increase the older you get. Anyhow, you can still significantly decrease the life insurance rates you’re set to pay by maintaining a healthy lifestyle and the like.
If you have questions with regards to the possible insurance premium computation suited for you, don’t hesitate to reach out to a licensed life insurance professional near you.
