Five Factors That Impact Life Insurance Prices

There are two conclusions we can draw from the recent economic fall out from the pandemic: prices are rising and Americans are having to make some tough choices in order to maintain previous standards of living. Price matters. In fact the top reason people give for not purchasing life insurance is that it is too expensive (limra.com).

What is considered to be expensive is subjective as all of us are in a slightly different financial position. However, when it comes to the cost of life insurance American consumers seem to be in agreement but have missed the mark by a wide margin when estimating the true cost of life coverage. More than half of Americans overestimate the cost of life insurance three-fold (limra.com).

How could this be? We'll attribute it to an overall lack of knowledge of life insurance and how it works. Just 31% of Americans claim to be very to extremely knowledgeable about life insurance. We're going to help increase that number today by diving into five factors that impact the cost of life insurance.

Five Factors That Drive Life Insurance Prices

Policy Type

The most important factor that impacts the cost of life insurance is the type of policy you decide to purchase. To keep things simple, there are two primary types of life insurance: Term and permanent. (Note: there are a few other types of life insurance but they are for a slightly different market and beyond the scope of this writing). Traditional, or term life insurance, is the type of coverage most people are familiar with. It is the simplest to understand and it provides the most amount of coverage for the lowest cost.

The insured pays premiums for a set amount of time and in return a death benefit will be paid if the insured dies during that period. when it period is over, the insured would have to renew the coverage or apply for another plan. It is typically used to cover debts like mortgages, or replace income. All things equal, this is the most affordable option for most people.

Permanent or whole life insurance are usually much smaller polices and as long as the premiums are paid, are guaranteed to pay the death benefit to the beneficiaries. Some plans even come with a cash value account that grows a small amount of money the insured can use or borrow against later. Whole life plans are designed for older clients and are usually purchased to cover funeral costs and other related expenses. Because the death benefit is guaranteed to be paid, whole life insurance plans tend to be much more expensive than term.

Health

After you decide which policy you need, your overall health status is going to have the largest impact on the cost of your premiums. Even if you are young, it is possible to have a health condition that could completely disqualify you for certain types of coverage.

For example, a lot of life insurance companies will not approve you for coverage if you were diagnosed with diabetes prior to turning 50 years old. That means a child that was diagnosed with early onset diabetes could not be covered even though they tend to be more health than those who are diagnosed with diabetes later in life. Insurance companies use health questions on their applications to determine if you are healthy enough for coverage and if so, how much they should charge for premiums.

Smoking

This ties in with your overall health. We all know that tobacco use can lead to a lot of health complications later in life. How does this fact impact how much your premiums cost today? Let's say that you are 35 years old and pretty healthy all things considered when you apply for coverage. But you smoke at least one pack of cigarettes a day every day. Statistically, you are going to die sooner than someone your same age but does not use tobacco products.

This being the case, your premiums are going to be considerably more expensive than a non smoker. It is important to note that all hope is not lost if you are a smoker and are considering buying life insurance soon. Some companies will allow you to use some tobacco products (not cigarettes) and still receive a non tobacco rating. Others will give you a lower rate for a year or two in order to give you time to quit. If you succeed then you will be able to keep your lower premium, but if you do not quite then your premiums will jump to a standard smoker rating.

Age

Your age will also have a significant impact on how much life insurance will cost. It is the insurance company's job to minimize their risk as much as possible. Older clients are more likely to die sooner than younger clients. Therefore the insurance company is going to charge a much higher premium to the older clients for taking on that risk. All else equal, the younger you are, the lower your premium costs will be.

Gender

Last but not least, your gender will have a significant impact on the cost of your life insurance. According to the CDC, in the US, women outlive men by an average of over five years (75.1 for men compared to 80.5 years for women). That is a considerable difference in the eyes of insurance companies. Since men tend to have shorter lifespans than women, they will pay a higher premium for the same coverage.

Key Takeaways

• Talk with an advisor to determine what type of life insurance you need. A term policy will provide more coverage immediately and for less than the cost of permanent coverage. But the price will increase as you age once the term ends.
• Permanent coverage will provide a smaller death benefit but you are locked into your price in most cases and as long as the premiums are paid the policy is guaranteed to pay out.
• Buy life insurance early. You'll save a lot of money, even if you go with more expensive permanent coverage. If you go that route, you could have considerable cash values to borrow against if you're in a pinch or even supplement retirement income later in life.
• Protection for your children. Some children's whole life policies come with a no cost guaranteed purchase rider which allows them to purchase additional coverage later in life at certain points without proof of insurability. This would allow your child to add more coverage later even if they were diagnosed with a condition that would have disqualified them under any other circumstance.
• Don't start smoking if you think you need more life insurance. If you're smoking now, quit. Your wallet will thank you.

Even if you have health conditions, life insurance is more affordable than what most people think. The best advice we can offer is to speak with a financial advisor sooner than later to see what best suits your family. All things equal, those who purchase life insurance today will receive better value for their money than those who wait.

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