Factors that determine Life Insurance Price

Before you find out the factors determining life insurance price, you will firstly have to find out how much insurance coverage you need. This is important because insurance coverage is also a major determining factor in the cost of an insurance policy. If you already have calculated that, let’s move ahead.

All insurance companies employ actuaries to fix the premiums of their policies. The actuaries need to consider various factors (both measurable and non measurable) and build them into the premiums. There are some factors that the actuaries already have information on (like mortality rate, claims paid percentages, etc.,) and the rest of the information comes from the applicant. We will first look at the information provided by the applicants that play a part in Life Insurance Price, one by one, in no particular order.

Age: Young, fit people who are just about to begin the most productive part of their lives are the ones who get the cheapest policies. The premium component gradually increases as the age of the applicant progresses. There is no intentional discrimination here against older people. Mortality trends state that the chances of mortality increase is directly proportional to age increase and the insurance companies base their calculations on the age risk factor. So, the older you are the higher you pay!

Type of policy: There are various types of policies; term, partial payment, pension plans, cash value…..etc., As a general rule, you can be sure that premiums increase directly proportional to the cash value benefits and complexity. Term plans are the cheapest and any other investment based policy will cost you higher. The coverage amount also plays a part. Higher the coverage, higher the premium.

Duration of the policy: This plays a more important part in wealth building insurance policies but even other wise, longer duration policies are priced cheaper.

Medical history and health: History of previous illness is a risk while underwriting a policy and therefore carries such people carry higher premium. This is a very important factor and if an applicant has illness history or have existing ailments, they have to be disclosed to the company, otherwise, the insurance company will outright reject the claim (when the need arises) citing suppression of vital information. Height and weight details are also used as factors.

Personal habits and occupation: Habitual smokers and drinkers will be charged higher, as will people employed in hazardous jobs (Fire fighters, scuba divers). Some hobbies (bungee jumping, car racing) are also deemed high risk and will attract higher premiums.

Other factors: Apart from the information provided by the applicant, the insurance actuaries need to input many other factors. Some of them are mortality trends, claims percentage, medical charts, illness charts etc., Insurance companies invest the premiums collected from policy holders and each company will have its own investment pattern. The actuaries need to build the returns on investment rates into the calculations of the premiums as well. All factors are given weightage and this is turn is used for the premium derivation. Each insurance company will have its own weightage and rating methodology. No two insurance companies have the same way of calculation. Life insurance price calculation is a complex and difficult process and can only be done by qualified people but we can definitely understand the factors that influence this calculation and the most common ones are listed in this article. Now is the time for you to find out which is the correct type of policy for you.

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