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How are Life Insurance Rates Calculated?

Far and away, insurance consumers say that what matters to them most is getting the best rate from their agents.

A case in point.

A recent study by PIA and The Partnership showed that when it comes to what insurance customers expect from their agents, the top-of-the-list item is “good value in the rates agents find for me”.

That expectation ranks ahead of traditional customer service needs like “taking care of my needs” and “having trust in the agent and insurance company”.

That’s just the tip of the life insurance rate calculation iceberg.

Another study from Capco, a global technology consultancy

concludes that getting good insurance rates means so much to consumers that 72% of them would share some form of personal data to get cheaper insurance premiums (72%), whether by using fitness and health tests (33%), home smart devices (32%) and wearable tech such as smartwatches (29%). Additionally, among young people (18-24s), this willingness rises to 87%.

How Life Insurance Rates are Calculated

With insurance consumers so eager to get a good rate with their policies, you’d think they’d be hyper-aggressive about knowing how their insurance rates are calculated. But that’s not the case, as industry data shows the formulas and calculation that create a policyholder’s insurance rate doesn’t resonate with customers.

That’s unfortunate, as a little knowledge on insurance rate calculations goes a long way in getting better deals on consumer insurance policies. The fact is, the more you know about how insurance rates are calculated, the more money you can save on your next insurance policy.

On the upside, understanding rate creation formulas is easier than one may think, insurance experts say, with calculations based on common sense criteria.

“Quotes for life insurance policies are calculated using a variety of factors, including the applicant’s age, sex, smoking status, and health history, amount of coverage desired, and the type of policy being applied,” said Randy VanderVaate, chief executive officer at Funeral Funds of America, in Dallas, Tx.

The cost of a life insurance policy will also be affected by whether or not the policyholder works in a dangerous profession. “For example, if the applicant was a professional underwater welder, that applicant will likely pay more for life insurance than someone who doesn’t weld underwater,” VanderVaate said.

Additionally, not all policies are calculated the same.

“For instance, life insurance and travel insurance rates are calculated differently although they may take some of the same factors into consideration, like age and health,” said Rayne Morgan, a content marketing manager at PolicyAdvisor in Toronto, Canada.

The difference all comes down to risk.

“Insurance companies want to identify and avoid risk, so depending on the insurance product, the company will consider different factors to determine the risk level to insure the applicant,” Morgan said. “Consequently, life insurance would focus on age and health whereas home insurance may pay more attention to the resident’s location.”

Mortality a Big Factor With Insurance Rate Calculation Structures

Mortality may be the dominant factor when calculating insurance rates.

“The premium for a life insurance policy is based on the probability that the person will die during the term of the policy,” said VanderVaate. “This probability is calculated using a table of mortality rates published by an organization such as the Insurance Service (ISO) or The Society of Actuaries.”

The mortality table assigns a number to each age, representing the percentage chance that a person of that age will die within one year. “For example, if you are 30 years old, your chance of dying within one year is 0.027%, or 1 in 3,700,” VanderVaate said. “So the mortality table would assign a number to 30-year-olds that represents this percentage – in this case, 3,700.”

To calculate your life insurance premium, the insurance company will use the number from the mortality table that corresponds to your age and multiply it by your policy’s face value. “Consequently, if you have a $100,000 policy and you’re 30 years old, your premium would be $27 ($100,000 x 0.027%).”

When calculating life insurance policy rates, companies also typically prioritize the applicant’s age, gender, and health. 

“Age is perhaps the most critical factor in determining rates, as insurers use actuarial tables to determine expected longevity,” VanderVaate said. “The younger an applicant is, the lower their rates will be.” 

Gender also affects rates as females tend to live longer than males, which means female applicants will often see lower rates than their male counterparts. 

Lastly, health is a significant consideration for insurers when setting rates.

“Those consumers in good health will generally pay less for coverage than those with pre-existing medical conditions,” VanderVaate added. “Insurability is decided by considering several factors, including your age, health, lifestyle, and family medical history.”

Conclusion: Insurance Rate Calculations

Once a consumer has a basic grip on what factors go into an insurance rate calculation, that individual can take some key steps to curbing policy rates.

“For instance, your credit score plays a significant role in your rate so maintaining a good score is important,” said P.J. Miller, a partner and independent insurance agent with Wallace & Turner Insurance in Springfield, Oh. “You can also bundle your home and auto insurance to receive a discount.”

Increasing your deductible will also reduce your insurance rate but if you have a claim, you’ll need to cover more out of-pocket and could potentially end up paying more.

“Other ways to improve your rate will be coverage specific,” Miller said. “For example, don’t get speeding tickets while driving for auto insurance, or replace an old roof for homeowners insurance.”