If you have been looking for life insurance cover, you might have noticed that different policyholders typically pay different premiums for the protection they need. You might wonder, then, how insurance carriers determine the rates they charge to consumers. Although life insurance rating is less complex than pricing strategies for other types of insurance such as home and automobile cover, there are still several factors that make up premiums. Knowing these factors can help you understand your costs and even reduce the stress of making your premium payments.
Type of Life Insurance Cover
The type of life insurance you buy substantially affects the premiums you will pay. This is because different types of policies expose insurance companies to different risks. A whole of life policy, for example, ensures that the carrier will pay a death benefit as long as you pay the premiums to keep your policy in force. Insurance carriers also incur the extra expenses of maintaining cash value accounts and determining interest payments on these types of policies. For this reason, a whole of life policy is typically the most expensive option.
A term life policy, conversely, does not issue a death benefit if you are still alive after the policy term expires. Because the payout is not guaranteed, the insurance carrier can provide death benefit cover at a much lower cost.
The cost of a term life policy also depends on the nature of the death benefit. A level term life insurance policy, which features a death benefit that remains constant throughout the policy, involves higher premiums than other types of term policies. Increasing and decreasing term policies, which involve death benefits that change over time, pose a lower payout risk than a level term life insurance policy. For this reason, you can usually purchase increasing or decreasing benefit term cover at more affordable rates.
Life insurance rates also depend on individual factors that vary from policyholder to policyholder. The younger you are when you purchase cover, the less you will pay each year to maintain your policy. This is because the insurance carrier is less likely to have to pay a death benefit for a younger consumer than for an older policyholder. Your medical history can also affect your rates. If you have a history of chronic or life-threatening conditions, the insurance company is more likely to have to issue a death benefit payment.
Other personal factors may also affect your premium rates. If you live in a high-crime urban area, for example, you might have to pay more for cover than a policyholder who lives in a rural area. Premium rates are also higher for individuals who regularly consume alcohol or use drugs or tobacco because these substances increase the risk of life-threatening conditions. If you engage in risky or dangerous hobbies or work activities, you can also expect to pay higher level term life insurance premiums.
Length and Amount of Cover
If you choose a term life insurance policy, the length of your policy term will affect how much you pay for cover each year. If you select a relatively short term, you can provide your loved ones with death benefit protection at a relatively low cost. If you opt for a longer term, though, you will pay more for cover. This is because a payout is more likely for a longer term than for a shorter policy.
The amount of the death benefit will also determine your premiums. Insurance carriers typically charge a specific premium per £1,000 of death benefit cover. This means that your yearly premium cost will be a multiple of the base charge. If the insurer charges £15 per £1,000 of cover, for example, you would pay £1,500 per year for a policy that provides a level £100,000 death benefit.
Insurance carriers must also factor in other expenses, such as the cost of administering your policy and mailing policy statements. These expenses can vary significantly among insurance carriers. Because premiums can vary, it is important to obtain quotes from multiple insurance carriers before you sign a policy contract. This can allow you to provide your loved ones with adequate life insurance death benefit protection while minimizing the amount you spend on premiums each year.
Owen Pearson understands that there are many different types of life insurance policies available. Learn more about the different kinds of cover including how to find the best deal on your policy of choice at uSwitch.com.