Have you ever wondered how your premiums for life insurance are determined by an insurer? Or why your existing policy might have changed and the price increased? Insurance providers take many factors into account when determining how much to charge customers in premium costs. This guide will go through each in turn, so you know how to keep costs down for the future and are aware of how insurance companies calculate your fees.
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Factors affecting your life insurance premiums
Age, lifestyle and health
Your age, lifestyle and current health greatly affect the quotes given to you by insurers. These factors help an insurer determine the level of risk in insuring you. If you have any underlying health conditions that are hereditary, or have experienced a previous serious illness, an insurer will take the view that are you are more likely to make a claim on your policy than a person without any health conditions. An insurer will also ask questions about your current lifestyle, including how much you drink and whether you smoke (or have smoked previously). Some insurers will also ask whether you take part in dangerous hobbies or sports, such as skydiving or BASE jumping. This will affect your premiums, as an accident resulting from such hobbies could result in a death and subsequent claim.
The older you get, the closer you are to the day of your death (or at least, that’s the somewhat grim way that insurance companies like to see it). Life insurance policies generally cost less if you start them when you are younger. Bear in mind though that as you age, your premiums will go up due to the risk of you having health issues and complications with older age. The longer you take out a policy for, the more you’ll also have to pay in the long run.
It is important to declare your family’s medical history when making an application for life insurance cover. Inform the insurer of any illnesses and conditions that have occurred, including cancer, stroke, diabetes, heart disease and hypertension. Different insurers will take different views on such conditions. Make sure you read your policy wording carefully so that your cover does exactly what you need it to do. If you have lots of medical conditions or a rare condition in your family history, you can take out specialist insurance with an insurer that specialises in covering a range of more complex illnesses and high-risk cases.
Never withhold any information from an insurer regarding your health, family medical history or lifestyle, as this could invalidate your policy and make it impossible for you to make a claim. While insurers will do all they can to find out as much as possible about you, your health and circumstances, it is your responsibility to declare anything you feel they should know and to be transparent about your medical history.
Policy term
The length of cover you choose for a policy will also have an impact on your premiums. If you decide upon a fixed term life insurance policy for around 20 years, your premiums will be much cheaper than a whole of life assurance policy, which runs for the rest of your life until the day you die (and then pays out upon your death). Some whole of life policies have reviewable premiums, so the costs you pay may go up or down depending on the insurers’ valuations and your health.
Lump sum value
The larger the lump sum you’d like to receive from your life insurance upon your death, the higher your premiums are likely to be. When you take out a life insurance policy, you can choose either increasing or decreasing pay-outs. If you’ve taken out a policy to cover a loan or mortgage (that you’d be unable to pay off if you suddenly died), but which gradually decreases over time as you pay the debt back, you may want to choose a decreasing pay-out insurance policy.
Additional extras
If you have any optional extras on top of standard life cover with an insurer, this can also raise the premiums you pay. Insurers offer extras such as income protection for when you cannot work due to sickness, accident or injury, and critical illness cover should you develop any of the critical illnesses stated in your policy wording. Some couples also opt for joint life insurance policies that pay out when the first person passes away. Such options can raise the cost of premiums, as insurers are having to cover you for more.