The Cost of Life Insurance Depends On 8 Major Factors
Here is a simple question to decide whether you need life insurance: Does anyone rely on your income for their financial well-being? That could be children, a spouse, aging parents, or anyone else who could be considered some level of dependent.
If someone else relies on your income, then you probably need life insurance. Stay-at-home parents, retirees, and children generally don’t. You can think of a life insurance premium — the amount you pay monthly to the insurance company — like a three-legged stool. How much you pay depends on how much coverage you want, the type of policy you get, and how much risk you pose. The average person can expect to pay between $300 and $400 a year for life insurance, but it really depends on your situation.
The first step is calculating how much life insurance you need. This amount is called the death benefit and will generally be paid out to your beneficiaries in a tax-free lump sum. Typically, the higher your income and the more expensive the city you live in, the more money your family will need in your absence.
Next, you’ll decide what type of policy you want. In most cases, a limited-time, or term life insurance policy is a good fit for coverage because it’s the most affordable option. Whole life insurance policies can be six to 10 times more expensive than term life.
Finally, you can start getting quotes. Websites can help you compare premiums from different carriers based on the coverage you want, and you can apply as soon as you find one you like.
According to one source, a 30-year-old male with “preferred health” can expect to pay a monthly premium of $23 for a $250,000 30-year term life policy to $73 a month for a $1 million 30-year term life policy. Women pay less, on average, ranging from $19 to $58 a month for the same policies. By comparison, a whole life policy would cost the same 30-year-old male about $122 a month.
The carrier will then evaluate you on a variety of factors to determine your level of risk. This is often the most “rigorous” part of the process. Each insurance company weighs risk differently, but there are certain factors that they all consider when evaluating your application.
Here are the major factors every carrier considers:
Age: Life insurance premiums increase an average of 8% each year you age, regardless of health. The younger you are when you apply, the less it will cost.
Nicotine use: Being a nicotine user is one of the quickest ways to raise your life insurance rates. Smokers can pay two to three times more than nonsmokers. Some carriers also consider marijuana use.
Weight: Being overweight or underweight can affect your premium.
Health history: This includes your prescription history and diagnoses.
Medical exam: Life insurance companies also require — and pay for — a medical exam with blood and/or urine tests.
Credit history: Credit scores don’t affect premiums much, but financial red flags, including bankruptcy, will.
Driving history: Insurance companies will look over your motor vehicle report, which includes any officially documented violations, to determine risk.
Occupation: If your job involves high-risk activities, you could either be charged a higher premium or declined coverage altogether.
While some types of life insurance policies don’t require a medical exam for those in good health, going through an exam can give you more options for coverage. Finally, the insurer will set a premium and you can activate your policy with the first payment. (Source: Business Insider)