There are reasons for and causes of higher life insurance premiums. We will walk you through them and show you how to lower your payments. There are more than a handful of reasons why insurance premiums for identical plans may be higher for some individuals than others.
However, before discussing the different factors that affect life insurance premiums, we must understand two basic policies – term life insurance and whole life insurance. These two policies vary greatly not only in price but in what they offer.
Type of Life Insurance Policy
As this piece is to have you grasp the reasons for higher life insurance premiums, it will not go into great depth when speaking about term life insurance and whole life insurance. However, let’s start with a quick primer.
Term Life Insurance
This type of insurance lets applicants pay for just their life insurance. Also, this type of insurance will only cover a specific length of time – which is determined at the contract signing. It is a clean and simple plan where the insurer agrees to pay a certain amount of money to the beneficiary if monthly payments are made.
If you want longer coverage time or a larger death benefit, this will also bring up the premiums. Insurance providers often require a health exam, so any health complications will come to light at that time.
The arrangement simply ceases to exist at the end of the contract. All of the money being put in goes to the insurance provider. Of course, you could also just sign another contract when yours ends, but you will be older, and the company may have to do another medical exam so do not expect the same premiums.
Whole Life Insurance
This type of insurance plan often costs a lot more than term life insurance, but there is a reason for the increased cost. Whole life insurance policies have monthly rates that must be paid throughout the coverage, and usually, this rate will remain unchanged, which we describe as “level premium.”
Level premiums go towards two ends. They pay for the insurance part of the policy, and they also go towards building cash value, which increases over time at a fixed percent or perhaps dividends through participating policies.
Consider that level premium and how much value it will have later on down the line. It is initially expensive (5-15 times higher than similar term life insurance coverage), but when we factor in inflation and the relative price for the same insurance, it’s as quite as expensive. The term life insurance holder has to sign a new contract and pay the premiums of someone now 20-30 years older, the whole life insurance holder pays the same amount.
Causes of Higher Life Insurance Premiums
The basic idea is the same in determining whether premiums should increase. Individuals who are likely to pass away sooner carry a higher risk than those who are not. The company asks, “Are we taking on more risk because of this?” If the answer is “yes,” then the premiums go up.
So what do they look at in terms of risk assessment? There are numerous factors that insurance companies look at before offering a life insurance policy. We can break these down into two major groups – the things we cannot change and the things we can change.
Let’s break them down a bit further and go into detail about the rationale.
Factors You Can’t Change
The simple fact of the matter is that the younger you are, the longer you will be paying premiums to the insurance company before they have to pay your beneficiary. By the numbers, a person in their 20s is less likely to pass away than someone in their 70s or 80s. Thus, companies will offer younger applicants plans that are much less expensive than someone in their 70s getting offered a similar plan.
Statistically, women are likely to live 5 years longer than men, and insurance companies factor this into their risk assessment calculations. Women are more likely to survive longer, and thus, the company will offer them lower premiums.
So the rationale is very much the same as age. The longer you stay alive, the more premium payments you can make, and the less a company risks. You can expect insurance plans for men to have some higher premiums compared to ones for women.
Family Medical History
A family history of medical sickness means that a person probably also has a high chance of getting those same sicknesses. So, if strokes, high blood pressure, heart disease, and diabetes run in your family, there is a good chance that you may have the same even if you do not show symptoms yet. Second, to the illness itself, it is the potential that you get the illness that matters.
Insurance carriers are mostly interested in close family relations like siblings and parents, especially if they passed away prematurely from those genetic illnesses. Different carriers assess genetic predispositions in their own way and determine the effect they will have on premiums.
Health (some things you can’t change, others you can)
Insurance carriers often require health exams or check-ups before offering a plan. They note weight, height, blood pressure, and cholesterol levels and assess potential health issues. Some exams are more thorough and include electrocardiograms (ECGs) and tests for cancer detection.
What is important for you is to get problems like high cholesterol and obesity under control as best you can before the medical examination. Your healthier report will let you get better offers from the insurance companies, apart from feeling much better about yourself. Remember, these tests are to get qualitative data that they can use to determine potential risk.
Some carriers offer a “no exam” option to applicants. However, it is almost assured that choosing such an option will lead you to pay more per year.
Factors You Can Change
This shouldn’t come as a surprise, considering how many Americans drive and how much time we spend behind the wheel. Insurance companies may not ask you about traffic violations when you apply. But they can access the Department of Motor Vehicles records. Speeding violations and any DUIs show recklessness, and that can hurt your chances of being offered lower premiums.
The last three to five years are what have the biggest impact, though this depends on the individual insurance company. If you have had accidents in the past or had other violations, it may not matter as much the farther back they occurred. Having a clean record in the recent past, even if you have had issues farther back, gives you a higher chance of getting a better price.
Sometimes we take up offers to add a little more to our insurance policies, and most often these changes to the policy end up increasing the monthly premium. Each person is unique. The standard offer that an insurance contract offers may not fully cover what an applicant wants in a contract. Riders help to accomplish that by presenting options, at a cost of course.
Some of these include benefits such as the insurance company paying for your premium if you become disabled. A guaranteed insurability rider allows you to purchase additional coverage at designated dates without having to re-do all the underwriting. This kind of rider basically allows you to expand your insurance coverage as you grow your income over the years.
There are many other riders to learn about, and there are many more variants beyond those. Each insurance company will offer its own variations of riders you may have seen or heard.
Lifestyle and Occupation
Applicants who routinely participate in high-risk activities like B.A.S.E. jumping should expect their insurance premiums to be higher. The closer to the Reaper they dance, the less an insurer would want to cover them without higher costs.
The same is true for those who work in a dangerous profession. Hobbies and professions where you are constantly at risk lead to increased premiums. Coverage may be denied completely depending on the occupation.
It is not uncommon to have specific insurance to cover dangerous jobs and hobbies. But that is a subject for another discussion.
There are numerous reasons for higher life insurance premiums. If a quote seems high, see if you can decrease it to a comfortable level with lifestyle changes or fewer options. Remember that you can only bring that premium down so much.
Think about what is important to you in a life insurance policy. Don’t be afraid to go out and get some advice on how to pick the right one for you. Imagine spending 30+ years paying for life insurance thinking you are growing your investments. Only to realize you bought term life insurance.