Understanding Life Insurance and Rates
Life insurance rates vary from person to person depending on a number of factors. But before we can understand its rates, we must understand life insurance.
To understand what your life insurance rates will be you must first understand what life insurance is and what it provides for you and your beneficiary(s). Simply put life insurance is an insurance policy that provides the beneficiary with a lump sum of money upon the death or in some cases critical health, of the policy holder. The benefit to life insurance is that it gives the policy hold the peace of mind they need, to know they won't be passing any financial hardships to their loved ones. It is important that you go over the terms of the contract with the insurance company you choose for your life insurance. The reason for this is there are a few types of death that do not reap a benefit for the beneficiary. Most commonly these types of death are;
- War (the military has their own version of life insurance known as the SGLI Bill) Link this I'll write an article about SGLI for next week.
- Civil commotion (meaning there is an action by a large group of people similar to a riot that causes damages to either persons or property)
The final thing to know about life insurance policies is, they fall into two major categories. These categories are Protection policies and Investment policies.
Protection policies are the most common type and are specifically designed to pay a beneficiary in a lump sum upon the death of the insured. This is represented best by term life insurance.
Investment policies are designed to facilitate growth based over time and based on the premiums paid by the policy holder. In the US the most common forms of investment policies are;
- Whole life
- Universal life
- Variable life policies
Determining the cost of your life insurance policy is a process that has many factors. One piece of this process that stays the same is the use of mortality tables. These mortality tables are statistically based to show mortality rates for age groups based on a national statistic. They also include fields such as gender, and smoker/nonsmoker. More recently in the United States though a class-specific table has been introduced and used in conjunction with the mortality table. The class table is used to equate the health and family history of the policy holder. The results of these two tables are what is going to determine the premium and insurability of the policy holder.
Interesting fact for those looking at purchasing a life insurance policy; the present mortality tables are showing that approximately 0.35 out of 1000 males age 25 (nonsmokers) will die within the first year of their coverage. This statistic roughly doubles every ten years. So this leaves us with this statistic to equate. With a group of 1000 25 year old men in average health (that are all nonsmokers) who purchase a $100,000 policy the insurance company would have to collect $50 dollars a year to cover the predicted low cost of claims. (From earlier .35 out of 1000) So the equation used to determine the base cost of the policy is .35 expected deaths per year multiplied by $100,000 policy = $35 dollars a policy. The additional 15 dollars is an administrative and sales expense. This is just one example of how your rates may be calculated based on a national average. Remember that since the mortality table doubles every ten years traditionally the older you are the more expensive your policy premiums are going to be. This is because statistically speaking the older you are the more likely you are to die.
Other ways that the insurance companies determine premium costs is by inquiring on your health in ways like blood tests and urine samples and family history as stated earlier. These are just the same as a bank inquiring on your credit to determine whether you are credible for a loan so don't be surprised when the insurance company asks you to go to their certified clinic for some tests; it's just part of the process.
Once you have been accepted for a policy you will be broken into four different groups that the insurance companies use to distinguish their clients.
- Preferred best: Meaning that the insured is among the healthiest in the general population. They have no family history of early onset cancer, diabetes or other potentially fatal diseases and are not on medication at this time.
- Preferred: Meaning the insured is among those who are on medication for an illness and has a family history of "particular illnesses".
- Standard: The average consumer of life insurance policies is put in this category. Meaning they have had family history of fatal diseases and had taken medication for illness in the past and is currently on medication for illness.
- Tobacco: Those who use tobacco are going to pay a higher premium because of the health risks associated with tobacco use, such as lung cancer, emphysema, tongue cancer etc.…
Other factors that might not land you in a preferred category or may deny you of a policy are travel history, lifestyle and having a profession that puts you in unsafe situations. This is because the insurance companies need to make money as well. If you were to take out a life insurance policy for $100,000 make one payment and then pass away due to traveling in a high risk country and dying of a foreign disease the insurance company would be losing a large amount of money. Keep all of these factors in mind when looking to purchase a life insurance policy.