Insurance companies have interesting ways to determine premiums. All of them use medical records to help determine your risk, while others actually have you undergo a medical test, including blood and urine tests. We get quite a few questions about life insurance and how carriers calculate the specific cost of an insurance policy–as it turns out, there are a lot of factors that go into pricing life insurance. We won’t be able to cover all of them, but here are a few…
Life Expectancy
In general, life insurance is based on statistics. Data from mortality tables are used to determine expected life span, death probability, premiums, and the true cost of life insurance. Studies performed by the Society of Actuaries set maturity age on the mortality table to 121 years old. While it’s highly unlikely you will live to 121, this means “whole life” or other permanent life insurance coverage is guaranteed at the same premium rate until age 121. Basically, they take the cost of insurance each year from now until your 121st birthday, add them up and divide by the number of years. That way, you pay an average and it’s consistent.
Universal Life charges the premium based on that year’s insurance cost. So next year will be a little more, and the next a little more, and so forth. The premiums are low now and they gradually go up.
Term life is the same if it’s a one-year renewable term policy. If it’s a 10-year policy they look at the insurance cost for the next 10 years, add them up and divide by 10. So you have a steady premium for 10 years.
Younger people and healthy people pay less because actuarily they have less risk of losing their lives. The global actuarial history shows fewer incidents of death for younger people and those at their ideal weight, nonsmokers, etc.
Medical Records
Medical tests and Medical records are pretty standard things for insurance companies to obtain before offering you insurance. They will more than likely want to make sure that you are healthy and a good risk to take.
Premiums are based on where you are in the life span, coupled with your medical history and the exam determines where your premium costs are.
Medical Exams
Medical exams are usually required to get the lowest rates. Many require blood tests and urine tests. Additionally, you may be required to do things like stress tests and take tests like EKGs and MRIs. These costs will be covered by the carrier. They can deny applicants based on substance abuse as well. There are a lot of preexisting conditions that are automatically denied by most carriers, you should talk to your agent before you start the application process to see what product might fit in with your needs and be most beneficial to you.