How Are Life Insurance Costs Determined?

While many people get life insurance through their employer, if you work for yourself, you have to choose your own life insurance and fund it independently.

However, this doesn’t have to be a bad thing! In fact, as most people switch companies throughout their career, they lose their life insurance policies, and new ones get more expensive as they begin to grow older. So, whether you are self-employed, making a living in the gig economy, or traveling the world as a digital nomad, you’re in a great place to get life insurance. You won’t have to worry about losing life insurance when you have an independent plan, and you can get started now, while you are young and healthy.

People buy life insurance for a lot of different reasons. However, nearly everyone who considers owning a life insurance policy wants to protect their loved ones from any financial hardship that may come as a result of their death. If that’s your main goal, a simple and straightforward term life insurance policy will meet your needs. Wondering how much life insurance costs and how that price is determined? We’ve got these questions answered for you so you can make the best decision for yourself and your family.

Life Insurance Costs: The Basics

First things first: term life insurance is inexpensive and easy to understand. Based on your age and health status, you’ll pay a set amount of money at regular intervals so that if you pass away, the beneficiary you name on your policy will receive a lump sum of cash. If you live longer than the term of the policy, it expires, and your beneficiaries won’t receive a death benefit. You can choose to renew your policy at this point in time.

A 35-year-old female who doesn’t smoke and is in good health can expect to pay about $25 per month for a 20-year term, $250,000 life insurance policy. This means that if you make your payments and die within those 20 years, your beneficiary will receive $250,000. A $500,000 policy with a 20-year term would cost about $36 per month for this same woman.

If you are a smoker, you can expect to pay a significantly higher rate for life insurance. The same woman as a smoker would pay $145 per month for a $500,000 life insurance policy with a 20-year term (a difference of $109 per month!).

How Life Insurance Costs Are Determined

Life insurance companies, like any other insurance company, make money by collecting your premium payments. Their goal is to pay out death benefits as infrequently as possible. Of course, they must honor their contracts. When an insured person dies, there is rarely a delay in payment from the insurance company.

Life insurance companies manage risk by setting premiums based on age and health. With a term life insurance policy, if you buy while you are young and healthy, you can secure a low rate. That rate won’t change during the predetermined term of the life insurance policy, even if you become ill later.

There are several factors that go into determining life insurance costs. Life insurance companies use these factors to determine your life expectancy. Some of these factors include:

  • Lifestyle

  • Income history

  • Medical history

  • Health status

  • Family medical history

  • Credit report

Inside tip: There isn’t a standard that all insurance companies use, so it’s possible that one company may rate you as a high risk because you have asthma, but another company will offer you a much lower rate because of your age. Keep this in mind while you shop around!

Shopping Around for Life Insurance

Because you’ll probably only buy life insurance once, it’s important to shop around for the best rates and terms.

In general, ideal life insurance candidates have these things in common:

  • Strong driving record (no suspensions or terminations of one’s license)

  • No history of treatment for alcohol or drug abuse

  • BMI of under 35

  • No engagement in high-risk activities or hobbies, such as hang gliding, motorized racing, or rock climbing

  • No engagement in high-risk professions, such as off-shore drilling or mining

While one insurance company may not penalize you for having well-managed high blood pressure, another may put you in a lower class. Using a variety of factors, life insurance companies classify potential policy owners into categories. The lower you land on the list, the more you’ll pay for life insurance.

It’s possible to get a term life insurance policy without going through a medical exam. However, if you want a policy with a high face value, the insurance company will probably require you to participate in a general health evaluation. This oftentimes includes a blood test. The good news? These tests are free, and they offer an easy way to find out if you are in the healthy range for blood pressure readings and cholesterol levels.

If you work for yourself, life insurance is an important way to build a safety net for you and your family. Even a small, simple policy can go a long way towards protecting your loved ones and can give you peace of mind.

Peter Colis is the co-founder and CEO of Ethos. Ethos is a new kind of life insurance company built for people who don't have time for fine print, extra doctors appointments, or hidden fees. 

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