Life Insurance Test

TEST One of the leading factors that will influence your life insurance decisions is cost. Cost causes many people to forgo life insurance, despite the important coverage it provides. The most common reason for not purchasing a policy is that it is too expensive, according to a 2014 LIMRA Facts Report.

However, life insurance is less expensive than many people think. More than 8 out of 10 consumers overestimate the actual cost of life insurance coverage, according to LIMRA’s 2014 insurance barometer study. When asked to estimate the cost of a $250,000 life insurance policy for a health 30-year-old, the median estimate among respondents to the LIMRA study was $400. In fact, the cost would end up being around $150 a year, according to LIMRA. The consumer estimates in the study were more than double the actual policy cost.

Life insurance rates fluctuate based on factors such as policy type, coverage amount, health conditions, underwriting options, and the insurance company.

How much is life insurance?

It’s impossible to give a one-size-fits-all answer to the question of how much life insurance costs. Rates will vary depending on multiple factors. They are affected by policy type, coverage amount, personal factors, underwriting methods, and the insurance company.

When a life insurance company issues a policy, it takes on the financial risk of having to pay your beneficiary in the event of your death. The insurance company evaluates your current health and lifestyle and uses data to make an educated guess about your life expectancy. This process is known as “medical underwriting,” and it’s used by insurance companies to help set an appropriate premium for your policy. If you are older, unhealthy, and need a large coverage amount, you will likely face higher premiums than a young, healthy applicant who needs less coverage.

The sections below explain how and why different factors affect life insurance rates.

Cost varies by coverage amount

The amount of coverage you buy will affect your rates because it affects how much your insurer may have to pay if you die while the policy is in force. Premiums increase with higher coverage amounts.

The following table shows how the coverage amount can affect life insurance rates.

Coverage
amount
Estimated monthly cost for a 30-year level term policy*
$100,000 $16.19
$250,000 $28.00
$500,000 $49.44
$1 million $83.80

*Estimates are for a 30-year old male Californian who hasn’t used tobacco in the past 12 months, is 6 feet tall, and weighs 180 pounds. Sample quote data is from TIAA-CREF.

Cost varies by personal factors

Your personal factors such as age, gender, smoking status, and health conditions can affect your rates because they affect the odds of you dying while the policy is in force.

Age

Your life insurance policy premium is generally affected by your age when you enroll. Younger applicants can access lower premiums compared with older applicants who have comparable health histories.

The following table shows how age can affect life insurance rates.

Age Estimated monthly cost for a $100,000 30-year level term policy*
20 $15.41
30 $16.19
40 $21.77
50 $44.08

*Estimates are for a policy for a male Californian who hasn’t used tobacco in the past 12 months, is 6 feet tall, and weighs 180 pounds. Sample quote data is from TIAA-CREF.

According to the sample quote data, a 50-year-old male applicant would pay 172% higher premiums than a similar 30-year-old applicant.

Life insurance coverage is generally much cheaper for a young adult than for a senior. This trend is present across most age groups.

Gender

When you apply for a life insurance policy, you must provide your gender. Women typically outlive men, according to data from the Centers for Disease Control and Prevention. As a result, life insurance coverage is typically cheaper for women because it is less likely that an insurance company will have to pay a death benefit on a female’s policy. Males and females of similar backgrounds and health conditions could face different premiums for the same policy.

The following table shows how gender can affect life insurance rates at different ages.

Age Estimated monthly cost for a $100,000 30-year level term policy*
Male Female
20 $15.41 $12.85
35 $17.68 $15.05
50 $44.08 $29.30

*Estimates are for non-smoking Californians. Female profile is 5 feet 8 inches tall and 140 pounds. Male profile is 6 feet tall and 180 pounds. Sample quote data is from TIAA-CREF.

Health conditions and smoking status

Your health condition and smoking status also are factored into your policy cost when you enroll. During the application process, the insurance company will ask questions about your health and smoking status.

The number of questions will depend on the type of policy you choose. Guaranteed issue policies only ask a few questions, whereas other policies may require full medical underwriting that can include a medical exam.

Healthy non-smokers can get lower premiums because their risk of dying may be lower compared with unhealthy smokers.

The following table shows how health conditions and smoking status can affect life insurance rates.

Health
condition
Estimated monthly cost for a $100,000 30-year level term policy*
Good health, non-smoker $16.19
Poor health, non-smoker $22.40
Good health, smoker $41.30
Poor health, smoker $41.30

*Estimates are for a 30-year-old male Californian who is 6 feet tall and either weighs 180 pounds (good health) or 230 pounds (poor health). Sample quote data is from TIAA-CREF.

According to the chart above, a 30-year-old obese smoker would pay 155% higher premiums than a similar healthy non-smoker.

Cost varies by type of life insurance policy

The two main types of life insurance are term and permanent policies. Term policies are typically much cheaper because they cover you only for a specified period of time, while permanent policies cover you for the remainder of your life and usually include a cash value component. The price difference between a permanent and term policy can be hundreds of dollars a month, according to data from Trusted Choice.

You also can include additional riders on your policy, which can increase your policy’s coverage and flexibility, but they usually come at an additional cost.

Term

Term policies provide life insurance coverage for a specific period of time. Term policies are typically less expensive than permanent life insurance options as long as you do not need lifetime coverage.

If you enroll in a term policy, you can choose between a standard level term policy or enroll in a decreasing term policy. A decreasing term policy is usually less expensive because the death benefit decreases over time, according to Trusted Choice.

It’s important to note whether term policies have guaranteed rates or rates that are subject to increase in future years. Some policies offer guaranteed rates, which lock in a premium for a specific period of time, such as 5 years. Other policies increase every year. Guaranteed rates are usually more expensive at first, but could cost less in the long run.

Permanent

Permanent policies provide life insurance coverage for a lifetime as long as the premiums are paid. There are several types of permanent life insurance policies, including whole, universal, and variable.

Permanent policies are typically more expensive than term policies in the short term, but can be less expensive in the long term. Permanent policies also offer investment options that term policies don’t have.

Additional Riders

Additional policy riders can add to or expand your life insurance coverage, usually in exchange for a higher premium. Each life insurance company offers a different array of additional riders. Some common riders are the return of premium rider and the accelerated death benefit rider.

Cost varies by underwriting method

Before an insurance company issues a life insurance policy, it evaluates your current health and lifestyle and makes an educated guess about your life expectancy. This process is known as underwriting. Underwriting determines how much you should be charged for a policy or if you should be declined entirely.

Some life insurance policies require minimal health information for underwriting, while others require exams and a close inspection of your health history. Policies with less information required in the underwriting process — such as no medical exam policies — are issued more quickly but may come with higher premiums.

There are 3 types of life insurance underwriting methods: guaranteed issue, simplified issue, and fully underwritten.

Guaranteed issue (no medical exam)

Guaranteed issue policies are approved quickly, and usually with little regard to your health status. No medical exam is required, but insurers may ask a few basic questions about your health history. These policies are typically the most expensive if you are healthy because the insurance company has the least amount of information.

Simplified issue

Simplified issue policies are usually issued without a medical exam or lab work, but the insurance company will ask you several health-related questions and may request additional personal and medical records. These policies are usually less expensive than guaranteed issue policies but more expensive than fully underwritten life insurance policies because the insurance company has limited information.

Fully underwritten

Fully underwritten policies often have a long application process that often requires a full health evaluation that can include a medical exam, blood test, and medical records review. Fully underwritten policies usually have the lowest premiums for relatively healthy people because the insurance company has the greatest amount of information to use for underwriting.

Cost varies by insurance company

Individual insurance companies have unique pricing methods and can offer different premiums for similar policies. According to Census data, there were 946 life insurance companies in the United States in 2009.

For example, if your life insurance company knows that your city is prone to earthquakes, your policy could be higher than a similar applicant in a lower risk area. Your personal factors, such as age, gender, health status, location and other factors can be used differently by insurance companies.

Some insurance companies are willing to take on risky consumers in exchange for a higher premium. Other insurance companies choose to reject risky applicants altogether. It is important to compare rates from a number of insurance companies to find the policy and insurance company that works best for you.