How to Lower My Life Insurance Costs

While there isn't much you can do if a first-degree relative (parent, sibling or child) died of heart disease, cancer or complications of diabetes before he or she reached 60, you can take several steps to improve your risk of illness, which in turn will reduce your risk of death.

  • Stop smoking and all other tobacco – This is one of the best ways to lower insurance costs
  • Don't drink alcohol to excess – Next to smoking, insurance companies know that alcohol abuse is a major cause of illness and death
  • Maintain a normal weight – By maintaining a normal weight, the risk of heart disease, diabetes and cancer are reduced

Health and wellness factors contribute more to the cost of a life insurance policy than any other factors. While you can lower the cost of the policy by choosing a smaller benefit or term, the best way to reduce the cost is to be as healthy as possible.

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How Do Life Insurance Companies Calculate Premium Costs?

While not always pleasant to think about, the life insurance premium amount an applicant is quoted is determined by his or her age, health status and risk of death as they exist at the time of application. If the insurance policy is for term life, it will reflect the chance of the applicant will die during the term. If the premium quoted is for permanent life insurance, it reflects the certainty that he or she will die.

Like any insurance policy, a life insurance policy is the transfer of risk. When a policyholder purchases the policy, he or she simply transfers the risk of a financial crisis from his or her family to the insurance company. In return for assuming the risk, the insurance company must ensure that it will be adequately compensated. If the insured dies, the insurance company will be responsible for paying the benefit.

Insurance companies judge an applicant's risk based on others who present similar risks. To figure out the likelihood of paying the benefit, a life insurance company uses what are known as morbidity and mortality calculations. Morbidity is understood as being in a state of disease or in poor health. The result of morbidity is mortality. Mortality tables outline the number of deaths in a given group of people. Insurance companies review an applicant's morbidity to estimate the probability of mortality. The mortality tables allow them to determine the amount of risk they are assuming for each individual applicant.

How Do Insurance Tiers Work?

Insurance companies asses risk factors such as age, gender, personal and family medical history, occupation, highest level of education attained, credit score and sometimes even driving record to determine the amount of the premium. The most important of these is the health of the applicant at the time he or she applies for the insurance. Each life insurance company uses its own standard for each of its tiers, but in general, they work in similar ways:

The Preferred Plus Tier

Applicant has no past or present health issues and no personal history of major cancer, heart disease, diabetes, substance abuse or high blood pressure. The applicant has no family history of heart disease or cancer in a first-degree relative before the age of 60. As for lifestyle, the applicant has no more than three moving violations within past 36 months and no DUIs within last 60 months. He or she has not used tobacco within last 36 months and has age/weight appropriate cholesterol readings and does not engage in hazardous occupational or recreational activities.

The Preferred Tier

To qualify for the Preferred Plus tier, an applicant must meet all of the requirements of the Preferred Plus Tier, except that he or she can have high blood pressure that is controlled below 150/90. Those who have lost a first-degree relative to cancer before the age of 60 or have used tobacco within last three years will also qualify.

The Standard Tier

To qualify for the Standard Tier, an applicant must meet all of the qualification of the Preferred Plus tier, except that he or she can have a history of certain types of heart disease, diabetes, high blood pressure and some cancers.

How are the Rates for Permanent Insurance Calculated?

The same health factors outlined above are used to determine the rate of the death benefit portion of a permanent life policy. But because permanent life insurance has a cash-building account, the investments also play a role in determining the balance of the cost. There are three main kinds of permanent life policies: Whole, universal and variable.

Whole Life Insurance Rates

There are six types of whole life policies, but the two most common are called participating and non-participating policies. A participating policy "participates" in the earnings of the life insurance company. A dividend (the same paid to stockholders) is credited to the insurance policy owner's account.  Dividends are not guaranteed, and the rate a policyholder pays for the policy is more than that of a non-participating policy, which is not paid a portion of the company's earnings.

Rates for Universal Life Insurance

The costs for a universal life policy are determined by the investments chosen, the size of the death benefit and whether or not the policy owner decides to pay the premiums out of the cash account. Universal life insurance was designed specifically to allow for more flexible options that were not traditionally available with whole life insurance.

Variable Life Insurance Rates

The cash-building portion of a variable insurance policy is invested in accounts that function like mutual funds. Costs for the policy are determined by the size of the death benefit and type of investments that are selected by the policyholder.

Permanent life policies, regardless of the type of policy selected, will almost always cost more than term insurance policies during the first years of the policy. However, over time, a permanent policy may be much more cost effective and lower your insurance costs the longer it is in force.

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