September is Life Insurance Awareness Month. An entire month dedicated to bringing this awareness is needed because Americans are vastly underinsured. Why is that? Is it because they believe it to be too expensive? Is it because they think it’s confusing to understand? Well, today we’re going to explain the basic concepts of life insurance and talk about how much your life insurance may cost.
What is life insurance?
Life insurance is a type of insurance in which you pay a certain amount (premium payments) to a life insurance company and in exchange they agree to pay a lump-sum payment (the death benefit) to your beneficiaries upon your death.
Most people have a need life insurance, but those who have the greatest need are parents with minor children. Life insurance’s main function is to replace the income of someone who has died. Your children rely on that income to survive, they can’t take care of themselves. Take a look at this blog post for more information: Does Everyone Need Life Insurance?
How are life insurance costs determined?
What you pay for life insurance is determined by your risk classification. Risk classification is the process of grouping together risks with similar risk characteristics. People with similar levels of risk are placed in common rating classes and charged the same premium. The lower the risk, the lower the premium.
- Actuaries are responsible for calculating the premium rates for each insurance company.
- Underwriters are the ones who assess the individual applications to determine an applicant’s mortality risk.
- Mortality risk is essentially determining a person’s probability of death based on a number of statistics.
There are standard and substandard risk classes. Applicants with a normal or average risk profile will be accepted at standard premium pricing. If underwriting determines that the applicant has a higher mortality risk than average, coverage may only be offered with substandard pricing, this is known as being table rated. According to Swiss Re, one of the world’s largest reinsurance companies, more than 85 percent of life insurance applicants are accepted at standard premium pricing and only 1-2 percent of applicants are ever refused coverage.
Life insurance underwriting ensures applicants don’t end up paying too much or too little. All paid life insurance premiums essentially go into a big pot that gets invested and accumulates interest. When an insured person dies, the life insurance company reaches into this pot to pay the death benefit. It would not be fair for a 30-year-old cigarette smoking individual to pay the same amount of money as a 30-year-old who has never smoked. The cigarette smoker needs to pay more into the pot since their mortality risk is greater.
| Standard Risk Classes |
| Preferred Plus (lowest risk) |
| Preferred |
| Standard Plus |
| Standard |
| Tobacco Risk Classes |
| Preferred |
| Standard |
| Substandard Risk Classesa.k.a. Table Rating | Pricing |
| Table A | Standard + 25% |
| Table B | Standard + 50% |
| Table C | Standard + 75% |
| Table D | Standard + 100% |
| Table E | Standard + 125% |
| Table F | Standard + 150% |
| Table G | Standard + 175% |
| Table H | Standard + 200% |
| Table I | Standard + 225% |
How much will I pay for life insurance?
Your premiums costs will be determined by the term length and coverage amount you apply for and your risk class. Your risk class is determined by your gender, age, health, family history, and lifestyle factors. Lifestyle factors can include your job, hobbies (avocation), alcohol use, and criminal record. For example, a deep sea fisherman has a higher mortality risk than a teacher.
| The Average Monthly Cost of a 20-Year $250,000 Term Policy for a 30-Year-Old Male Based on Risk Class | |
| Preferred Plus | $16 |
| Preferred | $20 |
| Standard Plus | $24 |
| Standard | $28 |
| Preferred Tobacco | $50 |
| Standard Tobacco | $64 |
| Table A | $35 |
| Table B | $42 |
| Table C | $49 |
Women statistically live longer than men, so they pay less on average for life insurance coverage. Take a look at the table below and compare the premiums to the previous table. I used the same criteria to calculate premium costs, except I changed the applicant to a female instead of male.
| The Average Monthly Cost of a 20-Year $250,000 Term Policy for a 30-Year-Old Female Based on Risk Class | |
| Preferred Plus | $14 |
| Preferred | $17 |
| Standard Plus | $19 |
| Standard | $24 |
| Preferred Tobacco | $40 |
| Standard Tobacco | $50 |
| Table A | $30 |
| Table B | $36 |
| Table C | $42 |
Your age is the most important risk factor used to calculate basic premium. As your age increases, your mortality risk increases. Don’t wait to buy life insurance, because the longer you wait, the more your insurance will cost. Take a look at the table below.
| The Average Monthly Cost of a 20-Year $250,000 Term Policy for a Male Based on Age and Risk Class | |||||
| Risk Class | Age 20 | Age 30 | Age 40 | Age 50 | Age 60 |
| Preferred Plus | $15 | $16 | $22 | $53 | $150 |
| Preferred | $19 | $20 | $27 | $63 | $179 |
| Standard Plus | $23 | $24 | $33 | $77 | $200 |
| Standard | $27 | $28 | $40 | $96 | $244 |
Note: I calculated the premiums for the above examples by adding the monthly costs from 12 different life insurance carriers and dividing them by 12 to get the average. Your premiums could be lower or higher than these examples.
If you aren’t sure how much life insurance you need, try using our handy dandy life insurance needs calculator. It’s easy to use and the questions aren’t complicated, unlike some online calculators you may come across. If you already know how much life insurance coverage you want to purchase, you can go straight to our term quoting tool. No contact information required until you’re ready to apply.
Natasha Cornelius/Quotacy Blog
Photo credit to:Â NeONBRAND