July 14, 2021

Four Things Life Insurance Companies Use to Determine How Much You Pay

Have you ever wondered what the secret sauce is in the formula life insurance companies use to determine how much you pay in premiums? Even if you hadn’t thought about it until you applied for life insurance protection, now that you’re looking for coverage, we’re guessing you’re curious.

You may be wondering why the price you saw in your online quoting tool is different than what the underwriter is suggesting. That’s because life insurance quoting tools don’t have all the necessary details and often use a “best-case-scenario” to show you the best price possible for someone like you. They typically don’t have enough information for underwriters to be confident they are offering a fair price to protect the insured. This price should also protect the financial stability of the company so when the time comes, they can pay the beneficiaries the policy amount.

Underwriters use a variety of sources, including a motor vehicle report, a prescription verification system, MIB (formerly known as the Medical Information Bureau), medical history interviews via telephone, paramedical exams where they take vital analysis with blood draw, and, in some cases, doctor’s statements and records to help determine overall health.

There is also a time value of money that helps determine a reasonable price for a consumer to pay: if you have a longer life expectancy, the life insurance company will need less of a financial commitment to be able to cover your payment at the expected time.

So, How Do Life Insurance Companies Calculate a Premium?

Woman calculating cost of life insurance

In an effort to help you understand your protection and what goes into the calculations, here are the four major things life insurance companies use to set the price of your policy.

1. Age and Sex

Two major factors in setting the price of your policy are your age and your sex. Your life insurance premium is essentially a mathematical equation that tries to determine how long you are expected to live. The younger you are, the longer you have until you reach the end of your life expectancy, and the lower long-term financial risk you are to the company. This generally means a lower premium for you.  

Underwriters also take biological sex into consideration since men typically do not live as long as women. Because of that, men will typically pay a higher price for their life insurance coverage.

2. Height and Weight

Years of research have shown that your height-weight ratio can be an indication of more health risks. If you are too short for your weight or too light for your height, there might be some health risks like higher blood pressure, elevated or high cholesterol, or high blood glucose.

Life insurance companies must use all available information to balance these risks against the size of your policy. The higher the risk, the more they will charge since they need to remain financially stable in order to make payments when death benefits are claimed.

3. Chronic or Non-Chronic Health Issues

Existing health issues, or potential complications from them, lead to increased risk for the insurance company. That is why there is such a thorough process of determining your overall health in the life insurance process. Underwriters can evaluate the mathematical risk of various ailments which helps guide them when determining the price paid for a policy.

4. Life Events or Lifestyle Choices

Senior tandem skydiving Beyond the health indicators listed above, life insurance companies look at your lifestyle choices to understand how risky of a life you live. Simply put, rodeo clowns get chased. A skydiver jumps from a plane. A scuba diver enters an environment where they can’t breathe naturally. All of these situations have an element of risk involved, which increases the chances of pre-mature death.

Other behaviors not associated with thrill-seeking are factored into the premium cost as well. People with an OWI or history of accidents statistically have an earlier death. Other behaviors like smoking increase the likelihood of death, which the underwriter must consider as part of a life insurance application.

Can I Do Anything to Get a Better Rate?

Once you apply for life insurance coverage, there is usually not much you can do to change your rate for that policy. It is best to be candid about your health throughout the process so you get a more accurate quote up front and are placed in the appropriate health pool for determining your premium.

You can try to improve your health and potentially reapply for another policy at a later time. While you can’t change your height, you can take steps to improve your health by losing weight or quitting smoking. Quitting smoking for a year likely won’t have much of an impact on your rate. But if you quit for five years and reapply, that could place you in a different health pool.

Couple sitting at computerOne caveat to remember if you decide to apply for life insurance at a later date is that even if you are healthier, you will also be older, which means the age factor will likely raise your premium.

Get the Right Coverage

We hope this helps give you an idea of how life insurance companies determine how much you pay. Your situation is unique and you want to make sure your plan is tailored to provide the financial protection that your loved ones need. Our knowledgeable team of agents can help you understand your options and come up with a reasonable price for your life insurance policy.

If you’re ready to start the process of purchasing a life insurance policy, click here and start your journey to financial protection today.