How your Life Insurance Premiums are Calculated

Understanding insurance can be a tricky business. However, it’s important to understand the factors that go into calculating your insurance premiums—this can help you decide what type of policy will best suit your needs, and whether or not you can save money on your policy premiums.

Calculating your insurance premium begins with you—your insurer will estimate the risk associated with your lifestyle, and assign you an insurance status on that basis. For insurance companies, this process is all about assessing the amount of risk associated with your lifestyle—higher-risk lifestyles mean bigger premiums because you’re more likely to end up making a claim.

When it comes to insurance, the risks are mostly concerned with your health—if you’re a smoker, are overweight, or have a pre-existing medical condition such as diabetes, high blood pressure or heart disease, then you can expect to pay higher premiums. Similarly, if you’re employed in a high-risk job or you have a high-risk hobby your premiums will be higher.

Before you buy a standard insurance policy, you’ll be required to undergo a fairly extensive medical examination. This will include checking your weight and blood pressure as well as testing blood and urine for signs of disease as well as for the presence of nicotine, illegal drugs and certain prescription medicines. For this reason, it’s pointless to try and lie on your insurance application—if you’re a smoker and you say you’re not, the medical examination will discover the truth. Note that some insurance policies will cover you without a medical exam. However these typically mean paying much higher premiums, since a company that will insure anybody without first assessing their physical health is taking a substantial risk.

There are, of course, some risk factors that you can’t control. Women typically pay lower premiums because on average women live longer than men. Your age affects how much you pay too—young people pay lower premiums because they’re more likely to continue paying insurance for many years before they die, and the older you are when you first get insurance, the higher your premium will be. Your family medical history may also be a factor—if your family has a history of life-threatening disease such as cancer or heart disease you may have to pay a higher premium.

Based on your lifestyle, sex, age, and the results of your medical examination, you’ll be assigned a status. This simply means that you are placed into a certain category for the purpose of determining what your premiums will be. If you’re young, healthy and don’t have a high-risk occupation, you’ll be in a low risk or “preferred-buyer” category. On the other hand, if you’re a smoker or are overweight you’ll be in a higher-risk category. Each insurance company differs when it comes to determining how you end up in a particular category, and they differ in the premium rates they offer to each category, so when you’re buying insurance it’s important to shop around.