Last updated: 06/10/2020 | Estimated Reading Time: 3 minutes
How insurers calculate premiums
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.
In This Guide:
Your health and age
As with any other kind of insurance, the higher the risk of the company having to pay out, the more the policy will cost.
If you have any existing health conditions, or have had any serious illnesses in the past, 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 will also affect your premiums.
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.
Since the older you get, the close you are to the end of your life, 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.
Length of cover
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.
Size of pay-out
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 policies 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 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.