How Life Insurance Companies Choose Your Term Life Insurance Rate

Life insurance is a cornerstone of any solid personal financial plan, but to most people, there are many mysteries behind the scenes of life insurance. One of those mysteries is how insurance rates are determined. Understanding life insurance rates can help you navigate the many life insurance options and find a company that works with you to get the best rate possible.

Understanding the different life insurance rates can help you quickly and easily navigate the many life insurance options available to you and to find a company that works closely with you to get the best rate possible.

Insurance Policy Size

When signing up for term life insurance, insurers offer a range of policy sizes. This is an important decision, but also has a direct impact on what you pay each month. As logic would have it, you pay more for a bigger policy than a smaller one.

However, don’t pick a small policy size just to save a few dollars every month. Really think through the needs of your family or future family if you were to die. Is $500,000 enough? $1,000,000?  Will you need more?

The entire purpose of life insurance is helping the named beneficiaries through the financial loss of your paycheck going away, so making sure you have enough life insurance to cover your financial obligations such as a mortgage or perhaps a small business loan, is absolutely crucial for your family’s ability to achieve their financial dreams in the future – and for you, the peace of mind is priceless.

Your Age and Health

The number one factor in determining your rate is your age and health status. Insurance companies use this information to determine your overall risk and the likelihood of your death during the term of the life insurance policy.

The younger you are, usually the lower your rate. Many young professionals and millennials today are waiting until they have children to sign up for life insurance, but each year they wait costs money. Signing up for term life insurance in your early twenties is generally much less expensive than your late twenties or early thirties. Don’t procrastinate and put off getting life insurance if you plan to have a family in the future.

Insurance companies also review your medical history and the results of a no-cost medical exam to assign you a risk profile. In addition to your age, they will look at other medical information like your body mass index, cholesterol, blood pressure, blood sugar, and other metrics that you likely review and discuss with your doctor at an annual physical exam. There are no big surprises or trick questions, just standard health information.

Your Lifestyle

Alligator wrestling, swimming with sharks, rock climbing, skydiving, and flying are all considered high-risk activities by life insurance companies, and most likely will increase life insurance rates. These and other high-risk activities are listed in the life insurance questionnaire to determine if the applicant lives a typically low-risk or high-risk type of lifestyle.

That doesn’t mean you should lie about these activities (that’s insurance fraud) or not do the things you love and enjoy to do. Just be aware that some activities are considered high-risk by life insurance companies and could possibly lead to a higher rate.

Risk Categories

Based on the results of your medical exam and lifestyle underwriting, you will be assigned a risk category. Each category corresponds to a rate set by that insurer. The most common risk categories are:

  • Preferred Plus
  • Preferred
  • Standard Plus
  • Standard

Those categories generally have both a smoker rate and non-smoker rate. Because smokers have a higher risk of passing away than non-smokers, smokers pay more for life insurance.

It’s All About Risk

At the end of the day, life insurance rates all come down to the level of risk. Higher-risk individuals, whether due to age, health, or lifestyle factors, will pay more for life insurance than low-risk individuals.

Many people may be surprised to find out they qualify for a top rate bracket even with one or two health risk factors, so don’t be discouraged from applying for life insurance. You never know your life insurance rate until you do. Life insurance is a critical investment in financial freedom and one that you hope to never use.

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