Ever wondered how insurers work out your monthly premium?
Most of us want the security and reassurance that comprehensive life insurance cover can bring. However, no one wants to pay more than they have to on their monthly premium.
But how do insurers calculate life insurance premiums and more importantly, how can you make them more affordable?
The cost of your premium is determined by statistics and maths calculations carried out by the underwriters at each insurance provider. Different insurers have different underwriting processes.
Below we have gone into detail on the many different factors that influence the cost of life insurance premiums. We have split them into 2 areas; personal factors and policy factors.
Personal factors that affect your premiums
- As you would expect age has a major impact on the cost of your monthly premiums
- All things being equal, the younger you are when you take out a life insurance policy, the lower your premium
- This is simply because older people are more likely to die during the policy term
- A good way to secure very low premiums is to take out life cover in your 20s or 30s.
Height & Weight (BMI)
- Insurers factor in your height and weight to establish whether you have a healthy body mass index (BMI)
- If obese, you are statistically more likely to suffer certain medical conditions which could affect life expectancy
- Conditions include type 2 diabetes, heart disease, stroke, high blood pressure, breathing problems and some cancers.
Find out your Body Mass Index by using the NHS’s online BMI calculator.
- Having conditions, like type 1 diabetes or high blood pressure, could increase your premiums considerably
- If you have previously suffered from cancer, the majority of insurers will not provide cover until you have been in remission for at least 5 years.
Family medical history
- Some insurers will look into your family medical history to establish whether there is increased risk of contracting a serious illness, like cancer
- If there is a history of severe hereditary illnesses in your family, this is highly likely to increase the cost of your premiums.
- If you have used tobacco or nicotine products in the past 12 months, insurers class you as a smoker
- Smokers statistically live shorter lives and are therefore considered a higher risk by insurers
- There is a proven link between smoking and life-threatening illnesses, such as throat cancer, lung cancer, and heart disease
- As a result, insurers mitigate their risk by enforcing higher premiums
- A smokers premium could be double that of a non-smoker.
- Certain jobs are deemed high risk by insurance providers and therefore result in higher premiums
- Common examples would be those who work in the armed forces, fishermen, police officers, offshore workers, firemen and prison officers.
- If your hobby is perceived to be dangerous by your insurer this could also increase your premiums
- If you regularly partake in activities like motorsports, skydiving or horse riding then you can expect to pay a higher premium.
- If you regularly travel to areas, either through work or for pleasure, which insurers deem to pose an increased health risk, this is likely to increase the cost of your premium
- An example of an increased health risk would be a country with very high levels of disease and/or violent crime
- Syria, Libya, Iraq, and Somalia, would be categorised as high risk by most insurers.
Visit the UK Governments foreign travel website for information on over 200 countries.
Gender (not anymore)
- Being male or female (in the UK) used to influence cost, with women who statistically live longer, enjoying lower premiums
- However, when the European Court of Justice Gender Directive was introduced in December 2012 it became illegal to take gender into account when calculating insurance premiums
- This affected motor and private medical insurance, as well as life insurance
- It is unclear at the time of writing this article whether ‘Brexit’ will have an impact on this legislation.
Although age and health are obviously hugely influential factors in the cost of your premium, it is important to understand that all of the above factors together combine to give insurers a picture of the potential risk you present.
Policy factors that affect your premiums
There are 4 key areas that relate to your policy, which all have a major impact on the cost of your monthly premiums:
- The level of cover you require (size of pay out)
- The type of cover you choose (fixed term or whole of life)
- The length of cover (how long the policy term runs)
- The type of premium you choose (guaranteed or renewable).
Level of cover
- In simple terms, the more you want your insurance policy to pay out, the more expensive your monthly premiums
- The level of cover you need will be determined by certain factors, like how many dependents you have, your outstanding mortgage and whether you want to leave an inheritance
- Adding additional elements, such as critical illness or terminal illness, is likely to increase the cost of your premium
- If you are over 60 and/or have pre-existing health conditions premiums can rise considerably.
Type of cover
- Whether you choose a level term, decreasing term or whole of life policy will have a big effect on your premiums
- Whole of life will always be the most expensive as it guarantees to pay out and insurers cover their risk by enforcing higher premiums
- Level term premiums are more expensive than decreasing term, but you receive a fixed pay out if you die anytime during the policy term
- Decreasing term premiums are lower, but so is the pay out which decreases over the policy term, (commonly inline with a repayment mortgage).
Length of cover
- For fixed term policies, the longer the term the more expensive the premium
- The logic being, if you are covered for longer, an insurer is more likely to have to pay out
- Most whole of life policies will come with premiums guaranteed for a set period (often 10 years)
- However, after this initial period, the policy is subject to review and premiums may increase based on any health problems you may have contracted during this time.
Type of premium (guaranteed or renewable)?
- Whether you take out a fixed term or a whole of life policy the type of premium you choose will have an effect on the premium cost
- There are 2 types of premium, ‘guaranteed’ and ‘reviewable’
- A guaranteed premium is one which the insurer promises to keep stable throughout the term
- In contrast, reviewable premiums are inspected by the insurer at regular intervals
- Reviewable premiums tend to be cheaper at the start of the policy. However, they can work out more expensive in the long term, as premium prices increase.
When making a life insurance application it is really important to be completely open and honest. In the worst case scenario failing to reveal key information, such as previous medical conditions, could result in the insurer refusing to pay out.
Reducing the cost of your life insurance premiums:
- Living a healthy lifestyle and avoiding activities, such as smoking and heavy drinking, can drive down premiums
- If you are obese, losing weight could eventually lead to lower premiums
- Make sure you are not overprotected and paying unnecessarily high premiums
– Have your personal circumstances changed? Children left home? Mortgage paid off?
- Taking out life insurance when you are young is a great way to lock in a low premium
- You could save money with a joint policy, but weigh up the cost vs level of cover you require
- Paying your premium annually, instead of monthly, could save you money
- Look for hidden policy extras that you may not require, like waiver of premium or accidental death benefit
- Evaluate the type of policy you have. Would changing to decreasing term provide sufficient protection?
- Use a professional life insurance broker, such as Reassured, to compare the best quotes available.