How Are Life Insurance Rates Determined?
The Process Behind the Premiums
How are life insurance rates determined? If you are looking for information about the cost of life insurance – congrats! You are really ahead of the game.
Unfortunately, far too many people think all life insurance companies are created equal and this misconception isn’t clarified when they check out the online rates.
Hey, they look very similar. The difference really lies in the underwriting process. This is the procedure insurers use to figure out the risk associated with providing you with coverage.
Always remember life insurance is a business. These companies WANT you to live to the end of your term so they do everything in their power to figure out how long you will live.
So let’s take a peek under the hood to see how this works right now.
Select The Type Of Coverage You Want, The Length of the Term & the Face Value
There are two basic types of life insurance:
- Term Insurance: Provides temporary coverage for a period of time….or a term which comes in increments such as 10, 20 and 30 years. Once the term is over your coverage stops. Remember there is no guarantee your beneficiary (person you select to get the proceeds) receives a payout.
- Permanent Insurance: Provides coverage until the day you die. It also typically comes with a cash value accumulation feature that can be borrowed against in your lifetime.
Both of these types of coverage traditionally require you to undergo a medical exam. The medical exam gives the life insurance company important information about your health and lifestyle.
How are life insurance costs calculated?
This data is passed to an underwriter – or the person tasked with issuing your rating. They decide base on your health, lifestyle, etc, what your accurate rating class is. This ultimately determines the price you will pay.
If you are in moderately good health, this process gives you access to lower rates
You can also get coverage without having to complete a medical exam. This simplified issue life insurance, however, does require you to answer a battery of questions to qualify.
For the purposes of this article, we are talking about traditionally underwritten coverage.
What Type of Insurance Should You Pick?
One of the major factors in deciding whether you need term or permanent insurance is whether you want to guarantee a payout when you die.
Term life insurance is temporary so there is a very good chance you will live beyond the end of your term. This makes the premiums MUCH less expensive.
If you want coverage until the day you die you select permanent coverage which is much more expensive.
For most people, most of the time term life insurance fits the bill. It gives you protection through your most vulnerable years.
However if you have an estate, business interests, a dependent with special needs and/or a cottage you want to pass on, then permanent coverage may be right for you. This is why you should always speak to an independent agent. We can help you find the right product.
How Long Should Your Term Be?
If you opt for permanent coverage you can skip this section…
BUT if you selected term it’s important to assess what your future needs are.
Terms typically come in 10, 20 and 30 year increments. You don’t want to insure unnecessary periods of time – but locking in rates when you are young and healthy is a smart idea because as you age coverage gets more expensive. For example, if you have a young family and a mortgage, you should have a 20 to 30 year term policy that protects your kids and the 25- year amortization of your home.
In fact, if you wait too long you may actually even become uninsurable.
I have a tendency to nudge people toward longer terms if they don’t pick out permanent insurance because you never know what the future holds. It’s better to get a longer term when you qualify for better rates than it is to scramble for coverage at any cost later in life.
How Much Coverage Do You Need (the Face Value)?
Remember life insurance can be a complicated product. Even something as simple as selecting a face value can pose issues.
When clients first come to seem me they usually have a number in mind.
Whether they select term or permanent life insurance they must choose a face value. For permanent insurance the numbers are usually lower simply because the cost is so much higher. Clients pick coverage from $25,000 for a final expense policy up through to $1 million-plus if they have an estate.
For term insurance higher face values are more affordable so we see more clients purchasing more comprehensive coverage.
Typical face values for term are: $100k, $250K, $500K and $1 million.
While $100K may sound like a heck of a lot of money – it’s not. If you are using the life insurance proceeds to cover a shortfall because of lost income this money evaporates quickly.
We recommend anywhere between 7 – 15 times your gross income as a guideline.
Meet With Your Agent to Answer Health & Lifestyle Questions
This is a very important part of the life insurance process. First of all, PLEASE select an independent life insurance agent…
…and I don’t just say this because I am one.
If you have been reading my blog you know that not all life insurance companies are created equally. Which means it’s very important that you don’t buy a policy from a tied agent (someone who sells policies for a specific company) BEFORE checking in with Policy Architects.
We have access to the very best life insurance companies in Canada and will find you the most affordable policy, hands down.
This can literally save you thousands. OK now let’s get on with the show.
Honesty is the Best Policy
When your agent calls you or comes to your home – they ask a series of questions. Your answers give the insurance company important information about your lifestyle and health.
It’s VERY important to be honest. Do NOT think that leaving out little details gets you a better rating. First of all the more honest you are the more iron clad your coverage is. If you leave anything out it can and will come back to haunt your beneficiary (person who gets the cash).
I have seen people lose their payout because the policyholder decided NOT to tell their agent about a casual smoking habit.
OUCH. Even if the death had nothing to do with smoking – not giving the insurer the whole story gives them the right to decline the death benefit.
Remember Lying is FRAUD
In a nutshell, if you are considering leaving out information, lying or making something seem less worrisome than it is – DON’T!
This is NOT the time to cover stuff up and if you think it will save you some cash it won’t. Trust me underwriters are VERY good at their job and the information will surface one way or another…
…and if it doesn’t it may bite your beneficiary in the bum. Investigations of claims DO happen if one is made in the first 2 years of your term.
TD Insurance conducted a survey of Canadians to gauge the “habits, attitudes, and knowledge” about insurance. The survey revealed some surprising results. According to the Second State of Insurance Report, one-fifth of Canadians admitted to lying on an insurance application or leaving out information when completing the application. Unfortunately, lying on an insurance application can have serious consequences.
Take the Physical
Once you submit your application your agent sets up an appointment with a nurse who conducts your physical.
The exam is a point of anxiety for a lot of my clients. I am here to tell you it’s no big deal. The nurse comes to your home, collects a urine and blood sample, weighs you, takes your height and asks a few simple questions…
…and that’s it.
All in all it takes less than an hour. I think a lot of my clients are worried that something catastrophic will be revealed during this exam. Nothing could be further from the truth. More times than not everything is just fine. In fact most people are pleasantly surprised when they get their results back.
Your Data is Sent to an Underwriter
The medical data and the answers you gave to the questions posed by your agent and the nurse are then sent to an underwriter. This is a person that works for a life insurance company to assess the risk of insuring you.
Their job is to analyze your situation and assign you a rating. Ratings are a scale life insurance companies use to assign your premium (or the amount you pay monthly, yearly or in a lump sum).
The ratings are as follows:
- Preferred Plus: This is the best possible rating. You are in top form and your rates are very inexpensive.
- Preferred: This means you are in excellent health with no family history of serious illness. This is a very good rating and you will pay less than someone issued a standard rate.
- STANDARD**: Most people fall into this category. It means you are in good health but it could be better. Possibly you have a family history of cancer or maybe you even have well-controlled high blood pressure.
- Rated: This is when you have a serious medical issue that does not make you uninsurable. If you have childhood diabetes you will be rated. This means the life insurance company is charging you more because the risk of insuring you is fairly high.
- Postponed: Possibly you have outstanding medical tests or have a medical issue the insurers need more time to clarify.
- Declined: You have serious medical issues and the insurer is unwilling to cover you at this time.
Choose Your Life Insurance Company Well
This should really be at the top of this list. It’s one of the most important decisions you make and it GREATLY impacts the amount of money you spend over the term of your policy.
The reason I put this here is to show you what can happen if you make the wrong choice.
If you pick a company that is tough on weight you may end up getting a different rating than you would have from an insurer that is lenient when it comes to weight.
So what does that mean? A lot. So let’s say you received a standard rating from the company you applied to – but you would have received a preferred rating from the one you overlooked. The difference in what you pay over 30 years is notable.
A 30 year old, non-smoking male in good health applies to BMO and receives a standard rating. He pays $45.90 per month for a 30 year term policy.
Total savings for picking the right company: $1,944
The Cost Gets Higher the Older You Get
My client, now a 40 year old, non-smoking male in good health, applies to BMO and receives a standard rating. He pays $91.80 per month fo hid 30 year term.
The same 40 year old, non-smoking male in good health applies to Wawanesa and receives a preferred rating. He pays $77.40 per month for the same policy.
Total savings for picking the right company: $5,184
If You Are Wondering: How Are Life Insurance Rates Determined
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