Term Insurance Rates

Term life insurance has long enjoyed a deserved reputation as the lowest-priced form of life insurance. That reputation has been enhanced over the last decade by a veritable price war among carriers. Term insurance rates have fallen to what appear to be rock-bottom levels – although experience shows that all such characterizations are subject to refutation.

The revolution in technology has been instrumental in the decline of term insurance rates. The insurance business, once driven by personal relationships between buyer and insurance agent, is now governed by objective factors. Information about competing companies and policies, once difficult to acquire, now is available on the Internet for the price of a few keystrokes.

Term life insurance is the most homogeneous commodity among life-insurance policies and the most conducive to comparison solely on the basis of price. It is instructive to examine a range of prices for a few simple, hypothetical policies in order to get a general idea of the state of term insurance rates in America today. The comparison will also impart some useful general knowledge about what factors influence rates and the strength of that influence.

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The Term Insurance Rate Sample

A website specializing in providing free insurance quotes was visited in order to acquire sample quotations for a hypothetical policy for a 6-foot-tall, 170-pound male of varying ages. Insurance companies are regulated at the state level and rates vary by state. These samples were all generated for a particular Midwestern state. Price quotations were obtained for five different companies in order to get a range of premium rates. Coverage amounts, policy terms and smoking status were varied in order to observe the effect on premium amounts.

Term Insurance Rates for a 10-year, Level-Term, $100,000 Policy

A 30-year old male drew an annual rate range between $87 and $107 for a 10-year, level-premium term life policy. This astonishingly low rate – less than $10 per month and less than $0.50 per day – reflects the very low possibility of death for a 30-year-old over the next 10 years. The first point of comparison is age. Since mortality risk rises with age, it stands to reason that this range of rates will be higher for an older man.  The question is – how much higher?

A 40-year-old confronts an annual rate range between $101 and $131, not much of an increase. Increase the age another 10 years to 50 years old, however, and the rate range increases to $184-220 – more than double the range for the 30-year-old. The chance of dying between ages 50 and 60 is much greater, although still small, than it is between ages 30 and 40.

Term Insurance Rates for a 20-year, Level-Term, $100,000 Policy

The annual rate range for the 30-year-old male is $113-147, compared to $87-107 for the 10-year level-term policy. These rates are still very low, but why is there any increase at all? The insurance company is assuming more risk in insuring the man for 20 years – between age 30 and 50 – than in previously insuring him for only 10 years. The additional risk does not double the premium, but it does increase it. The results for 40-year-olds ($144-180) and 50-year-olds ($278-337) reflect the same pattern.

Term Insurance Rates for a 10-year, Level-Term, $1,000,000 Policy

$100,000 is a very low face-value amount for life insurance. $1,000,000 is an amount that might reasonably replace the income of the household breadwinner. (6% interest income on $1,000,000 is $60,000, a reasonable income for a household breadwinner.) The annual rate range for a 30-year-old on a 10-year, level-term, $1,000,000 policy is $290-370. The first thing to notice is how affordable this rate still is, from $25 to $30 per month. Second, notice that the rate is not 10 times the rate for the $100,000 policy. In part, this reflects the fact that administrative costs play a minor role in premium rates and those costs are the same for a policy of any size and term. In addition, competitive pressure may be much greater for the more common coverage amount. The rate ranges for the 40-year-old ($365-420) and 50-year-old ($955-1060) follow the same pattern.

Term Insurance Rates for a 20-Year, Level-Term, $1,000,000 Policy

Once again, the longer term produces higher rates, but not proportionately so. The annual rate ranges are $445-520, $670-729 and $1910-1990, respectively, for the 30-, 40- and 50-year-old man.

The Effects of Heavy Smoking on Term Insurance Rates

Health affects life insurance rates because it affects mortality risk. The health factor that is most systematically linked with life-insurance rates is smoking. Life insurance companies have specific rates for smokers, calibrated to the level of smoking. The following ranges suggest the effect that smoking more than 1 pack of cigarettes per day has on term insurance rates.

For the $1,000,000 coverage amount only: the 10-year policy annual rate ranges are $1009-1295 (compared to $290-370) for the 30-year-old, $1669-2055 (compared to $365-420) for the 40-year-old and $3889-5025 (compared to $955-1060) for the 50-year-old. The 20-year policy annual rate ranges are $1710-1875 (compared to $445-520) for the 30-year-old, $3009-3575 (compared to $670-729) for the 40-year-old and $7579-9295 (compared to $1910-1990) for the 50-year-old. These differences are nothing short of astronomical. Apparently, they make even term life insurance price-prohibitive for all but the wealthy, once age 50 is reached.

Summary

This casual survey of some term insurance rates conveys useful information. For the young and healthy, term life insurance apparently is indeed dirt cheap. The price rises as the term increases, but less than proportionately. As age rises, price increases gently at first, but begins rising rapidly by the time age 50 is reached as mortality risk begins to loom larger. Finally, health affects term insurance rates. Smoking status is the clearest indication of this. Heavy smoking causes premium rates to triple or quadruple, making even term life insurance prohibitively expensive for many people.

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