Compared to whole life policies, term life insurance represents a cost-effective way to protect your loved ones from financial devastation if you die prematurely. Still, term life premiums can be expensive under certain circumstances. If you have been shopping for term life quotes, you might wonder why your rates are higher than those paid by friends, family members, or neighbours.
Term life insurance does not come with a one size fits all price tag. Instead, insurance actuaries use several factors to determine how much each applicant pays for coverage. These factors can dramatically affect your expenditures for life insurance coverage. They typically include:
It stands to reason that a 20-year-old would pay less for term life coverage than a 60-year-old would pay for a comparable policy. Why? Simply put, a 60-year-old is statistically more likely to die before the end of the policy term. This means that the insurer assumes a greater risk of paying a death benefit to the policyholder’s beneficiary.
It is important to note that your term rates are based on your nearest age at the time of policy inception. If you celebrated your 20th birthday last month, you will be rated as a 20-year-old. Conversely, if only three months remain until your next birthday, the insurance company will rate you as a 21-year-old. This means that your premiums will be slightly higher even though you have not yet turned 21.
Many consumers are confused by the fact that gender plays a role in determining life insurance rates. Still, nearly every life insurance carrier considers gender as an important factor. Statistically, men are more likely to engage in dangerous activities than women. They are also more likely to drink, smoke, and eat unhealthy foods than women. Because of these behaviors, men are statistically more likely to die from cardiovascular disease, cancer, accidents, and other causes. For this reason, term life insurance rates are typically higher for men than for women.
3) Tobacco Use
People who use tobacco are more likely to die early than non-users. Tobacco use puts you at risk for a host of problems including emphysema, cancer, chronic hypertension, heart disease, and stroke. Insurers recognize these risks and assign significantly higher rates to tobacco users than non-users. In most cases, you must have gone an entire year without using tobacco in order to qualify for non-user rates.
4) Medical History
When you apply for term life coverage, the insurance company will obtain reports from the Medical Information Bureau and review your medical history. They use this information to place you in a preferred, standard, or substandard rating tier. As you might expect, preferred tier members enjoy substantially lower rates than substandard members.
Your insurance company might also require a medical exam. This allows the company to identify health problems for which you have not yet sought treatment. A medical exam also includes height and weight measurements, which helps the insurer decide whether to rate for potential obesity-related risks.
5) Term Length
Term life policies are typically available with coverage periods of 10, 20, and 30 years. If you know your family will not need continued protection over several decades, you can choose a shorter coverage period. This might be appropriate if your children will be out of the house and you will have all of your debt paid within several years.
Typically, longer coverage periods come with higher premiums. This is because the insurer assumes a higher risk of payout. As long as you are young and in relatively good health, there is a low likelihood that you will die within 10 years; however, the likelihood that you will die within 30 years is significantly more substantial.
Of course, different insurance companies charge different rates for identical coverage. Before you sign a policy contract, it is important to obtain quotes from several companies. This can help you find the coverage your loved ones need at the lowest price possible.