How is Your Life Insurance Rate Determined

While it may not necessarily be a pleasant thought to contemplate, the life insurance rate an applicant is quoted reflects his or her current age, state of health and risk of death. If the policy is for term insurance, it reflects the probability of the applicant's death during the term. If the rate is for permanent insurance, it reflects the certainty of death.

A life insurance policy is simply the transfer of risk. When an applicant purchases a life insurance policy, he or she is merely transferring the risk of financial hardship from his or her family to the insurance company in the event of his or her death. In return for assuming this risk, the insurance company needs to make sure that it is being adequately compensated. It's similar to a bank that issues a mortgage. Because it is assuming the risk of default on the loan, it will charge an amount of interest that compensates for the risk.

Insurance companies assess an applicant's profile based on others with the same profile who present similar risks. To determine the likelihood of having to pay a claim, an insurance company uses morbidity and mortality tables. Morbidity is a state of disease or poor health. Mortality is the result of morbidity. A mortality table outlines the number of deaths per any given population. An insurance company, then, looks at an applicant's morbidity in order to estimate the resulting mortality. It then uses the mortality table to figure the amount of risk it is assuming for an individual applicant.

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Determining Rates for Term Life Insurance

Insurance companies use factors like age, sex, personal medical history, family medical history, occupation, education level, credit score and driving record to arrive at the final premium amount, the most important of which is the applicant's health status at the time of application. While each life insurance company has its own names for each of its classes or tiers, in general, they work as follows:

Preferred Plus

No past or present health issues.  No history of major cancer, heart disease, diabetes, substance abuse or high blood pressure; no heart disease or cancer in a parent or sibling prior to age 60; no more than three moving violations within past three years and not DUI within last five years; no tobacco use within last three years; appropriate HDL/LDL cholesterol readings; no hazardous activities.


As Preferred Plus, except that high blood pressure is controlled and not more than 150/90; cancer caused the death of parent or sibling before age 60; tobacco use has occurred within last three years; appropriate HDL/LDL cholesterol readings.


As Preferred Plus, except that there is a history of certain heart disease or diabetes; high blood pressure is controlled but based on age; history of some cancers.

What Can an Applicant Do to Reduce the Amount of the Premium?

While there isn't much an applicant can do if a parent of sibling died of heart disease or cancer before the age of 60, he or she can take several steps to improve morbidity, which will therefore reduce the likelihood of mortality.

Quit smoking and all other tobacco use – This is the best way to receive a dramatic drop in life insurance rates
Don't abuse alcohol or other drugs – Next to tobacco use, insurance companies know that substance abuse is a major cause of morbidity, which leads to mortality
Lose weight – By losing weight, an applicant usually lowers his or her risk of heart disease, diabetes and cancer
Get regular exercise – Improving cardiovascular function oxygenates the body, which leads to overall better health

If an applicant is currently in the Preferred tier because he or she has used a tobacco product within the past three years or is overweight, he or she can always purchase a term policy with the shortest term available. During the ensuing months, he or she can work to reduce the morbidity factors that allow the insurance company to charge more for the policy. Once these factors have been reduced, he or she can purchase a new term policy or convert the policy to one that is permanent. This way, he or she will still be providing the family with the coverage they need, while improving health and reducing the amount of the monthly premiums.

Determining Rates for Permanent Life Insurance

All of the same factors above are used when determining the rate for the death benefit portion of a permanent life insurance policy. However, because permanent insurance has a cash-building feature, the investments determine the balance of the rate. There are three types of permanent life policies: Whole life, universal life and variable life.

Rates for Whole Life Insurance

The most common whole life policies are participating and non-participating. A participating policy receives a dividend payment based on the earnings of the company. The dividend is credited to the policy owner's account just as if he or she were a stockholder. Even though dividends are never guaranteed, the rate a policy owner pays for the policy is higher than that of a non-participating policy, which does not participate in the company's earnings.

Universal Life Insurance Rates

The rate for a universal life insurance policy is determined by the investments, the amount of the death benefit and if the policy owner chooses to pay the premium out of the cash account. Universal life was created specifically to provide more flexible options that were not available with whole life.

Determining Rates for Variable Life Insurance

The cash account for a variable life insurance policy is invested in mutual fund-like accounts. The rates are determined by the amount of the death benefit and type of investments that are chosen. Regardless of the type of permanent policy selected, it will be more expensive than a term policy. However, coverage will be in force for life. It cannot be cancelled unless the premiums are not paid.

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