6 Factors That Affect the Cost of Life Insurance

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Consumers buying life insurance should know what circumstances affect premium prices.

Key points

  • Life insurance costs vary depending on many factors.
  • Age impacts how much a life insurance policy will be.
  • Health status does too.

Life insurance coverage is needed for consumers who have loved ones depending on them. An untimely death could lead to a loss of income or a loss of crucial services such as childcare provided by a stay-at-home parent. Without a death benefit to replace the deceased person's income or services, surviving family members could face financial disaster.

Those who are considering purchasing life insurance will obviously want to make sure they get the coverage their loved ones need -- at a fair price. As a result, it's important for consumers to understand the factors impacting the cost of life insurance so they can be proactive to keep their premium costs affordable.

Here are six of the most important things life insurers consider when setting the price of a policy.

1. Age

Life insurers consider the likelihood of having to pay out a claim when deciding on how much insurance premiums will be. They also assess how soon they may have to pay out money.

Obviously, someone who is younger is less likely to pass away soon. So, buying insurance coverage at a younger age is less risky for the insurer and premiums will be lower.

2. Health status

A person's health status also indicates the likelihood of their death. As a result, insurers generally take a complete medical history and may even require applicants to undergo a medical exam.

If a person is in good health, they should be able to get life insurance for an affordable premium. However, those with serious pre-existing conditions may be denied coverage or charged much higher premiums for a policy.

3. Type of coverage

There are different kinds of life insurance, including term and whole life policies. Term life policies have a specific coverage term, such as 20 years. If the policyholder doesn't die during the term, then the death benefit is never paid. Whole life policies don't have a time limit and can stay in effect indefinitely if premiums are paid over time. Whole life policies also have an investment component, and term life policies don't.

Since there's a chance that a term life policy will never pay out, insurers charge much less for this kind of coverage than they do for a whole life policy. Most people will eventually no longer need insurance as they stop earning income as they get older and enter retirement. Their dependents also grow up and stop relying on them. As a result, a more affordable term life policy is the better choice for most insurance buyers.

4. Length of coverage

The longer the coverage term, the more likely it is that the policyholder will die while the insurance is in effect. Because of this, a policy with a longer term will usually cost more than a policy with a shorter one.

5. Coverage amount

Insurance buyers get to select the amount of the death benefit that will be paid to their chosen beneficiaries. The higher the death benefit, the higher the premiums since the insurer could potentially be forced to pay much more money.

6. Riders

Finally, insurance buyers have the choice to add riders -- or additional coverage -- to life insurance. There are a wide variety of different add-ons that people can choose from, including coverage for their kids or disability protections that allow them to keep their coverage but avoid paying premiums if they become disabled.

These riders add costs, but provide additional protections, so those buying a policy should carefully consider whether they are worth purchasing.

Many of these factors, such as when a person buys insurance, are within buyers’ control -- so those who are young and healthy should think about buying life insurance coverage ASAP to keep costs down as much as possible over time.

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