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Have you ever wondered just how life insurance premiums are calculated? As a consumer who’s in search for the most affordable premiums, it might appear as though very little thought is put into how much the carrier will charge a named insurance for a requested death benefit. While it might look as if the premiums figured is pulled out of thin air at the time of a quote, all of the heavy-lifting is done behind the scenes to ensure profitability. Compare life insurance rates now by using our FREE tool above!
Companies take a very close look at risk and how likely an applicant is to die while the policy is active before a rate is estimated. Within this estimate is a list of different charges the providers collects to cover the cost of pure life coverage, the cost to cover administrative expenses, and funds that are used for investments. One of the charges is referred to as a mortality charge and using this is a common practice in he industry. Read this guide to mortality charges and life premiums to get familiar with rate determinants.
Understand How Life Insurance Companies Protect Themselves Against the Risk
When insurance carriers extend coverage to named insureds, they are on the line for hundreds of thousands of dollars or even millions of dollars.
Since it’s possible that a person could pass away just months into a policy issuance, policy premiums are never guaranteed, and this is why the life insurance underwriting process is perhaps the most thorough one in the insurance industry as a whole.
If you apply for a fully-underwritten life policy, you can bet the company will be looking into your medical records, your habits, and even your family history to put you into a risk class and to determine how much to charge you. These risk-based premiums are often lower than the premiums charged for substandard guaranteed approval policies because the company is better able to protect itself from premature death.
What is the difference between morbidity rate and mortality charge?
Insurance companies use different figures to come up with how much needs to be charged to cover a person’s life. While morbidity rate and mortality charge might sound like two terms for the same thing, they aren’t.
A morbidity rate is determined after an applicant’s economic behaviors, hobbies, and health status are reviewed. The rate that’s assigned helps with risk classification and represents how likely someone is to get sick and what types of diseases they’ll likely have. This morbidity rate will then have a direct effect on the mortality charge on the policy, which is the actual cost of insurance coverage.
How is a mortality charge used to calculate risk-based premiums?
Now that you understand how life insurance companies protect themselves, you might be interested what types of numbers are used to turn morbidity risk into an exact number. Once an application has been reviewed and the morbidity rate has been taken into consideration, it’s then possible for a company to calculate personalized rates.
With the right mortality charge, the company is able to assume how much it needs to collect to cover the death benefit payout based on how long the company has predicted the client will live.
This is why insurers pay actuaries the big money to review data and to make predictions.
What is the relation of life expectancy and the mortality charge?
Life expectancy will have a major effect on a mortality charge. After all, if a company has looked at all of the facts presented and determined that client A will like to 65 and client B will likely live until 80 because of their lifestyle and economic behaviors, the company has more time to collect premiums for client B. Here are some factors that affect life expectancy:
- Age-specific death rates for people in the population
- Genetic makeup
- Personal medical conditions
- Family medical history
- When you were born
What demographic factors are taken into consideration on a life application?
To calculate your life expectancy and the risks associated with your lifestyle, companies ask you a load of questions on your life insurance application. You might not think everything is important, but companies weigh every answer that you provide. Here are some of the factors that can affect your mortality charge and ultimately your life insurance rates:
- Age, gender, country where you were born
- Height and weight
- Lifestyle habits like racing, smoking, drinking, exercising, etc.
- Annual income and net worth
- Health status
- Traveling abroad
- Past surgeries
- Prescribed medications
- Hobbies like flying, scuba diving
- Driving record
Why do insurance companies have different mortality charges?
Are you wondering why one company might have a low mortality charge and another has a high one? Well, the reason behind this is because of the competitive marketplace. Companies are free to charge reasonable rates that are approved by the department that regulates the insurance industry in the state. Since the carrier is able to target the market segment they desire, their rates may be most competitive for just one client in one specific demographic.
What other charges are calculated into premiums?
The mortality charge isn’t the premium you will pay in total. There are additional charges on the premiums that will add up to your total premium. These include charges for operational expenses, underwriting costs and the amount that’s put into a savings or investment fund.
How does age impact a mortality charge?
When you’re young, mortality charges are low. What many don’t know is that between 7 and 14, the charge increases. This charge then drops from 14 to 20 and will start to increase from 21 and on. It’s important to price the cost of life insurance when you’re primary concern is affordability. Just remember, not only does age and health affect the charge, so does the type of policy you choose and the riders that you add on for additional protection.
Just remember, not only does age and health affect the charge, so does the type of policy you choose and the riders that you add on for additional protection.
Make sure that you take time to request life insurance quotes through a rate comparison tool so that you can see which company offers most reasonable pricing. Once you’ve compared the life insurance rates, you can apply for the best plan that fits into your budget. Enter your zip code in our FREE tool below to start comparing life insurance rates now!