Money Expert > Life Insurance > How Insurers Calculate Premiums
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Last updated: 16/05/2025 | Estimated Reading Time: 6 minutes
Ever wondered why your life insurance policy costs as much as it does? Or why the cost of your existing policy might be changing?
We’ll go through the kinds of things that insurance providers take into account when quoting life insurance policies they offer, and in doing so show you how you might be able to keep costs down wherever possible.
Life insurance premiums are the regular monthly payments you make to maintain your life insurance policy. The amount you pay will vary depending on factors such as your age, health conditions, family history, and the level of life cover you choose. The life insurance costs are also affected by whether you choose term life insurance or a whole of life policy.
Life insurance premiums are calculated based on a variety of personal factors and policy features. Insurers use your medical information, age, and lifestyle details, among other variables, to determine the level of risk. Higher risk means higher premiums, while good health and low-risk activities can help you secure lower life insurance premiums. Tools like a life insurance calculator can give you a personalised estimate.
When life insurance premiums are calculated, several policy factors and personal circumstances are taken into account. These include other factors such as :
All of these contribute to your overall risk profile, which determines whether you will need to pay higher premiums or qualify for lower premiums.
As with any other kind of insurance, the higher premium you may face will depend on the risk of the company having to pay out.
If you have any existing health conditions or any medical history of serious illnesses, your premiums will be more expensive than they would be otherwise. Any potentially hazardous aspects of your lifestyle, such as whether you smoke or whether you regularly involve yourself in any dangerous past times like BASE jumping, can lead to life insurance premiums increase.
Also taken into account will be any family history of serious illnesses like cancer or diabetes, where an increased risk of contracting them can be inherited. Different insurers will approach these in different ways though and some will not be interested in family history at all, so always make sure you read the policy small print.
You should never be tempted to withhold any information about any illnesses or conditions you have or have had though as doing so may invalidate your policy altogether. While insurers will make every effort to ask all of the questions they can to ascertain all of the relevant information, the onus is on you as the policy holder to be absolutely transparent, as withholding information can indicate a greater risk .
As the risk to insurers is lower compared to when you're older, life insurance policies tend to cost less if you open them when you are younger. Of course, the longer you have the policy open for, the more you will pay overall in the long run, but if you start it when you are younger you will be paying less each month than if you start it when you are a pensioner, for example.
If you choose a fixed term life insurance policy for, say, 25 years, then your premiums will be cheaper than they would be on a whole of life plan that assures you a pay-out in the event of your death, whenever this may be.
Most whole of life policies will come with premiums guaranteed for a set amount of time (often 10 years), after which they are subject to review and may increase based on any health problems you may have contracted during the set period.
Fairly straightforwardly, the more you want your insurance policy to pay out, the more expensive your premiums will be.
One option when taking out a life insurance policy is to opt for increasing or decreasing pay-outs. If you’ve taken out your policy to pay off a loan or mortgage whereby what you have to pay off decreases over time, then you might want to opt for a decreasing pay-out insurance policy.
Many couples opt for joint life insurance policies that pay out whenever the first partner passes away. Such joint policy arrangements come with higher premiums than others, given the increased risk of a claim, but of course the cost is shared between the two of you, so these policies are often a financially viable option.
There are various extras you can choose to add on to your life insurance policy that will increase the cover offered, providing additional benefits along with the cost.
For example, critical illness cover will protect you in the event that you should contract one of any specified illnesses, paying out if you are unable to earn as a result. The same goes for income protection insurance, and other payment protection insurance options.
Your life insurance cover refers to the lump sum your beneficiaries will receive in the event of your death. This payout offers financial protection to your loved ones, helping them cover mortgage debt, funeral costs, other debts, and ongoing living expenses.
There are different types of cover, including:
Choosing the right life cover depends on your goals and insurable interest.
Determining how much life insurance you need depends on your financial obligations. Think about:
The general rule is to consider your income and how many years your family would need financial support. That’s how you decide on how much cover you require.
When deciding how much life insurance you need, it's important to think beyond just the monthly payments. Consider your long-term financial goals, your mortgage or other debts, and the level of financial protection your loved ones would need in your absence. A well-chosen life insurance premium policy isn’t just a safety net, it’s a way to provide peace of mind and future stability. Take the time to compare policies, understand the factors that affect your premiums, and use a life insurance calculator to find the right balance of cost and cover that works for your personal circumstances.