How are life insurance premiums calculated?

IEurekaMoment-revisedf you’re thinking about life insurance, you’re probably wondering how much your premiums will cost. Your premium is the regular payment you make to the life insurance provider. While everyone’s situation is different, most life insurers follow a similar process to calculate your premium. The following outline will help you understand the steps involved.

Assessing your risk

When you apply for life insurance, the provider will review your personal situation in order to calculate the risks associated with offering coverage to you. To do this, they begin by considering the following:

  1. Your age – While it’s never too late to get life insurance, for lower rates, the earlier you start, the better. As you get older, the same coverage costs more, regardless of what type of insurance you select.
  2. Your health history – If you have health problems when you apply for life insurance, you could pay higher premiums. Insurers may also look at your complete medical history and could inquire about family health history.
  3. Your lifestyle – If you smoke or are seriously overweight, you will likely be classified in a certain risk group and will likely have higher premiums. Likewise, if you regularly engage in high-risk activities such as sky-diving or have a dangerous occupation like a firefighter, this could also affect your premium.

Reviewing the big picture

In addition to reviewing your personal information, a life insurance provider may also look at the costs associated with providing life insurance when determining how much premium they need to charge. These include:

  1. Statistical information – mortality (death) and morbidity (sickness) tables that estimate the average life expectancy for different age groups and enable the provider to spread the risk across large groups of people
  2. Economic climate – the expected interest that will accrue from investing premiums before the death benefit would need to be paid
  3. Cost of doing business – a life insurer’s operational costs (e.g. rent, salaries, legal fees, etc.)

Life insurance can seem overwhelming but it’s one of the most important decisions you can make. It’s also probably cheaper than you think. A recent survey showed that Millennials overestimate the cost of life insurance by 213%!1

However, everyone’s situation is unique and a life insurance agent can take the time to understand your personal circumstances and help you choose the coverage that best meets your needs. Foresters™ is an international financial services provider organization which offers quality life insurance and investment products.

Foresters™ is the trade name and a trademark of The Independent Order of Foresters, a fraternal benefit society, 789 Don Mills Road, Toronto, Canada M3C 1T9; its subsidiaries are licensed to use this mark.

1 Source: 2015 Insurance Barometer Study, LIMRA and Life Happens.

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