The price of life insurance can vary from one person to the next. Here are some of the factors that drive life insurance cost.
The cost of a life insurance policy depends on the specific person seeking coverage, among other factors. For that reason, you, your neighbor and your favorite coffee barista could all have the same type of policy, but pay a completely different amount for it.
So how is that amount determined?
Fortunately, you don't just draw straws. There is a methodology to it, made up of factors that are both influenced by your actions (such as your health choices or driving history) and factors that are outside of your control (like your age or gender).
Here are some of the most common factors that can drive life insurance cost.
Individual Factors in the Cost of Life Insurance
One of life's greatest lessons is that there are certain aspects of our lives that we can't control. That's why it's best to focus our time and energy on the things we can change.
The same is true of life insurance costs. There are several factors that influence how much you pay for life insurance (i.e. your "premium"), some of which you have control over and others that you don't.
Your age, for example, is factored into your life insurance costs. Although you can't relive your 20s, you can benefit from buying life insurance earlier in life rather than later. There's a big advantage for doing so, too.
Many permanent life insurance policies (such as Whole Life Insurance or Universal Life Insurance) allow you to lock in your rate for life. That means, if you buy a whole life insurance policy in your early 30s, you'll pay the same amount for it in your golden years.
As we mentioned, there are other factors within our control that can influence our premium rate, too. If you enjoy swimming alongside great whites on the weekends, you'll likely be paying more for life insurance than someone who watches "Shark Week" on TV.
Some Factors That Can Influence Life Insurance Costs:
- Health Status
- Nicotine Use
- Family Health History
- Criminal Record
- Driving Record
- Travel Plans
No two people will look exactly the same on paper, which is why the cost can differ so greatly from one person to another. For instance, you can be young and healthy, but pay a higher rate than a similar person based on your occupation, high-risk leisure activities, or family history of cancer.
That cost is also dependent upon the type of life insurance policy a person needs, the amount, and duration of coverage, all based on his or her family's unique situation. Read on for more about each of these.
Type of Life Insurance
There's no shortage of options when it comes to types of life insurance. Each life insurance policy has unique features, lasts for a different period of time, has different coverage options, and — as a result — costs a different amount.
There are two main types of life insurance: term life insurance and permanent life insurance (like Whole Life Insurance or Universal Life Insurance). Generally speaking, term life insurance policies cost less than permanent life insurance policies.
Why Do Life Insurance Policies Cost Different Amounts?
Term life insurance offers coverage for a set period of time — often between 10 and 30 years — whereas whole life insurance may provide coverage for up to a lifetime. Many permanent life policies also offer "cash value," which is money that's set aside for the future. As term life insurance policies don't last for a lifetime or accumulate cash value, they typically cost less.
You may be able to get a term life plan through AIG Direct at affordable monthly rates, while a permanent plan with the same amount of coverage could cost as much as 6 to 10 times the cost of a comparable term plan.
Another factor that can impact the cost of your policy is whether or not a medical exam is required during the application process. Most term life insurance policies require a medical exam and health questionnaire as a prerequisite for approval. With the additional information from the medical exam, insurance companies can more accurately assess rate class (and life insurance cost) based on your individual situation.
Amount of Life Insurance Coverage
Families come in all shapes and sizes. Some might have two dads, one mom or be led by a grandparent. Your family's needs for life insurance coverage are just as unique. To estimate the coverage amount yours may need, Life Happens recommends asking yourself these two questions:
- If I passed away, how much money would my family need to cover immediate expenses (e.g. funeral expenses, outstanding medical bills, rent or mortgage, or car payments)?
- How much income might my family need in the future, to keep my household running?
The more coverage you need, the more you'll likely pay to receive it. For example, a 20-year term life policy with $100,000 in coverage will cost less than the same policy with $500,000 in coverage. That's why it's important to really assess your family's needs now and in the future, so you're not buying too much or too little.
This guide can help you calculate the right amount of life insurance for your family. You'll be asked to consider questions such as How large is my mortgage? Or How many dependents do I have? All of these and more help determine the right amount of life insurance coverage for you.
Life Insurance Policy Duration
When you're considering a term life policy, the amount of coverage you can afford may be impacted by how long you'll need it.
Let's say you have two children, a mortgage and a hefty student loan. You want a term length that will see your youngest child through to financial independence. However, you also want enough coverage to help your spouse take care of family expenses, cover the mortgage and pay-off your student loans. In that case, you may decide that it's best to get a higher amount of coverage for a shorter duration of time, based on your budget.
In another family, there may be a need for longer coverage. Perhaps you have a special needs child that you'd want to provide for long into their adulthood. In those cases, you should consider a longer term length, or perhaps a permanent policy.
Luckily, you can also review, renew or add to your policy later on, when your financial situation and needs may have changed.
Insurers will always look at the full picture when determining your life insurance costs — and we can help you do the same.
For help in determining the right coverage for you and your family, get your free, personalized life insurance quote.
* Source: 2017 Insurance Barometer Study, Life Happens and LIMRA.