How are Life Insurance Premiums Determined?
- Rikin Shah | Licensed Life & Health Insurance Agent
- Fact-Checked (see our Editorial Guidelines)
- Updated: July 31, 2022
Life insurance premiums reflect each policyholder’s risk to the insurance company. All insurance, including life insurance, works on the principle of risk-sharing.
People opting for life insurance are required to pay a small portion of the potential insurance claims as a premium. This, in turn, allows the beneficiaries of those who pass away during the insurance period to receive a large sum compared to what they would have paid.
Life insurance companies are usually hesitant to provide coverage for people with a poor medical history as they have a chance of dying prematurely.
These people are considered “high risk” for their business, and insurance providers charge higher premium rates in such cases.
If an insurance company provides coverage to too many “high-risk” individuals, the premium rates would increase for others as well, as the company would need to pay out more in claims.
Otherwise, the company would pay out more than it collects in premiums from all its policyholders.
Hence, insurance companies need to be prudent in their approach and ensure that they can help the families of the policyholders during their time of need.
Underwriting
Underwriting is the process of screening and evaluating life insurance applications to determine the premium rate for the respective insurance policies.
The underwriting process helps keep the rates down by assessing those applying for insurance.
What factors do life insurance companies mainly consider?
Insurance companies usually look at the same health risks that doctors do.
This includes factors such as tobacco use, cholesterol ratios, high triglycerides, high cholesterol, diabetes history, height/weight ratio, and any illness or activity that could shorten a person’s life expectancy.
Summary of what determines the life insurance rates:
- Age
- Medical history
- Family medical history of parents and siblings
- Tobacco use
- Build (i.e. height/weight ratio)
- Gender. Since statistically, females have a longer lifespan than males, a female receives lower premium rates.
- Lifestyle: for instance, a person who has a history of engaging in adventure sports or traveling to dangerous areas of the world would receive higher rates
How does the insurance company determine your health category?
The company may ask you different questions based on your age and the amount of insurance you’ve applied for.
In most cases, a medical history record might be enough if you apply for insurance at a younger age and a smaller amount.
A physical examination that involves certain tests and lab work is occasionally necessary and is paid for by the insurance provider.
The insurance company would also seek authorization to access your medical records.
The insurance company then assigns you a rating class based on your medical history, physical examination results, and other considerations. These rating classes are super preferred, preferred, regular, or standard.
Each of these rate classes is associated with a different premium rate. Your age and gender, combined with the rate class assigned to you, will determine your insurance premium rates.
However, If you’ve had some medical issues in the past, you might still be given insurance at a higher cost. In the insurance sector, this is referred to as “graded risk” or “impaired risk.”
What if your medical history includes some health problems?
Agencies like GetSure work with several insurance companies, while others have access to just a few. Agencies can compare the plans of different insurance companies and find you the one with the best rate
What is included in the insurance physical examination?
When you purchase certain amounts of life insurance, the insurer will schedule a physical exam, usually at your home or office.
A paramedic, nurse, or doctor will check your weight, blood pressure, and other vital signs. On rare occasions, they may also collect blood and a urine sample. More tests, such as an EKG or X-ray, may be performed for larger insurance amounts.
Your urine and blood samples will be examined for any signs of diseases, cholesterol levels, diabetes, kidney or liver problems, and other issues. Additionally, the samples will also be tested for certain medications, the presence of nicotine, and illegal drugs.
How can you lower your insurance rates?
Make sure to look around the block. Collect quotes from several companies. Each insurance company has its own set of factors to determine the rate class.
What do you do if you have a medical history that may affect your rates?
When discussing life insurance products for the first time, be sure to let your insurance agent know about your medical history.
As mentioned earlier, life insurance companies usually have their own screening process and might offer different rates for a particular medical condition.
Experienced agents are aware of this and can help you find companies who offer lower rates than others for your medical condition.
Can your premiums be lowered after enrolling in a policy?
If your health improves significantly, you can inquire with the insurance provider and see if the company will reduce your rates.
There is no downside to this, as your policy has already been approved and signed, and your rates cannot be increased.
With evidence of improved health, there are chances you might be able to get a lower premium or rate class.
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