How life insurance premiums are calculated

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Admit it. There’s been some pretty impressive mathematic equations over the years, ones which most of us still struggle to fully comprehend, unless of course we are Professor Stephen Hawking. Or an advanced Casio Databank wristwatch from the 1980s.

Take for example the trip-off-your-tongue Euler’s Identity, which as we all know simply relates the seemingly random values of Pi, e and the square root of -1 to give us a squiggle juxtaposed with the letter ‘e’ and a couple of digits in close proximity.

Likewise the brain-bending Gaussian Integral, the Cardinality of the Continuum, the Analytic Continuation of the Factorial, the Explicit Formula for the Fibonacci Sequence or the slightly less ‘In Session at Radio One’ indie rock band name-inspired, The Basel Problem. All based entirely on a series of calculus and mathematical symbols which give you a headache just looking at them.

Thankfully the way in which your typical life insurance premium is calculated is a heck of a lot more straightforward. And although never threatening to win a Nobel prize for its arithmetical hypothesising, we’re confident that the grey matter behind the formulation of life insurance math WOULD nevertheless make for entertaining company at a dinner party.

Rather than take into account astrophysical factors beyond our simple minds, life insurance providers instead choose to scrutinise risk factors which traditionally range from a would-be policyholder’s age and occupation, through to their health and indeed, their interests and hobbies.

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It’s the perceived risk identified by insurers relating directly to the proposer’s age, job, current health status and pastimes which help establish whether they’re statistically likely to meet with their fate sooner or later.

And therein determine what is, essentially, a calculated risk.

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Whilst these are the key elements which go into the mix when it comes to life insurance companies quoting you a premium, there are of course additional differentials which will be figured in; some of which we touch on later.

Also worth bearing in mind that despite most of the leading insurer’s following this methodology to arrive at a series of numbers which they hope will appeal to you (if not unlock the key to the universe), each adheres to their own specific underwriting criteria and protocol at the end of the day, which goes some way to explaining just why prices tend to vary from company to company.

The good news (for men at least) is that sex no longer plays a pivotal part in life insurance calculations. Not since the European Court of Justice Gender Directive which was legislated back in 2012, which basically meant that the long-standing gender card couldn’t be played any more when calculating life insurance policies; historically women enjoyed cheaper premiums on the statistically-supported evidence that they lived to a greater age than men.

Age Counts

So, just what does matter when doing the life insurance math right here and now, and from the all-important insurer’s perspective?

Well, referring back to the intro and the proposer’s age (at the time of proposing, naturally) is a critical arithmetical tool facilitated by life insurance policy providers. And the inescapable fact of the matter remains, the more advanced in years the would-be policyholder is at the point of arranging suitable cover, then the more zeros there are going to be on the premium.

Effectively due to the accepted viewpoint that the older you are, the more prone you are to injuring yourself, being diagnosed with a serious illness and/or, ultimately, dying. Which of course would result in the life insurance provider coughing up all too soon. Therefore older applicants should brace themselves for paying more than their younger, fleet of foot counterparts seeking the same package, or alternatively look at bagging a dedicated over-50s policy. Which is why we’d always impress on people considering life insurance to make the move whilst their teeth are all their own.

Health Lottery

Not the ACTUAL Health Lottery, but the fact that your health is paramount to receiving favourable treatment (in terms of financial incentives) with life insurance policies, as this area is, arguably the most important one as far as the insurer is concerned.

Prove to them that you’re in fine fettle then look forward to lower premiums, show evidence that you like the sofa, cigarettes and fast food monumentally more than going for a run and consuming salads, and the omens aren’t good. For either your health or wealth to be brutally honest.

Insurers will run the rule over your height and weight, so as to work-out a proposer’s body mass index, or BMI. Which is like a health benchmark that GPs use to ascertain general health and wellbeing in patients as you’re probably already aware. The theory is – and correct assumption in most cases as concurred by the medical profession who’s advice life insurance policy providers routinely seek before compiling their profiling system – the more obese you are, the more likely you are to suffer from weight-related medical conditions; which could include respiratory conditions, diabetes and heart disease.

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Would-be policyholders will also be judged on their medical history, to determine whether any previous illnesses you may have had are cause for concern. If it flags up recurrent, and serious health issues such as type one diabetes or forms of cancer, then any chance of being offered life insurance cover will unfortunately be compromised. Either by way of significantly increased premiums or requiring proof of being in remission (with regards to cancer) for at least 5 years.

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With substantial research proving links between smoking and/or excessive drinking to diseases such as lung/throat cancer and health-impairing liver conditions, both smokers and heavy drinkers statistically lead shorter lives. As a direct result of this, life insurers routinely charge higher premiums which essentially mirror this greater risk.

In terms of smokers, insurers regularly work on the premise that you’re classed as a smoker if you’ve used tobacco in the past 12 month period, including cigarettes, e-cigarettes, cigars and even nicotine patches for that matter, while they rarely differentiate between volume of products consumed in this tobacco-based arena.

So despite you having a 20-a-day habit or just referring to yourself as a social smoker, you’ll be categorised as a smoker and penalised accordingly. The regular consumption of excessive quantities of alcohol is also frowned upon by life insurance providers, so if you knowingly partake in more than the recommended guidelines of accepted units, expect to see premiums rise as your health is justifiably brought into question.

What’s more, if life insurers believe that any hereditary illnesses which emerge from their liaising with your health provider is serious enough to warrant concern over your short to medium term wellbeing, then this too could, potentially hamper your application for a far-reaching policy. Close family members health details will be sought, including severity of any conditions they’ve had and more pertinently, at what age it manifest in them. These findings could impinge on an individual’s suitability for being offered a life insurance policy, and if granted then premiums could easily reflect the acknowledged risk.

Footloose and fancy-free, or in a committed relationship

Marital status will be considered by most life insurance providers, and it’s often a sound investment to opt for a joint package if you’re in a long-term relationship. Having said that, it’s equally important to be mindful that more often than not this type of plan works on what’s called a first-death basis. This, effectively means that in the event of the first person in the relationship dying, all the life insurance pay-out accumulated thus far by both parties will be distributed at that particular juncture to those listed by the co-policyholders as dependents. And will NOT be repeated when the second partner passes away; so perhaps it’s best to continue with separate policies after all, irrespective of whether you’re a husband and wife, civil partners or co-habiting with that somebody special.

2.4 children? Or whatever mathematical figure, could make a big difference

Whoever depends on you as a policyholder (i.e, partner, close family, children, aging parents, etc…) will have a bearing on what life insurance premium you’re quoted from the outset. The general rule of thumb is that the more people you have relying heavily on you at the best of times (and therefore, comprehensively more should you pop your clogs and leave them in your wake), equates to the higher the premium quoted; as it’s deemed that the level of financial protection needed is increased the more multiples of named survivors there are.

Think of it like this: you’d want your spouse and children to continue living in the manner to which they’ve been accustomed to in your fated absence, wouldn’t you? And not think of them struggling to make ends meet in the event of the major breadwinner not being around anymore. Therefore it’s only natural that you would wish for them to be fiscally taken care of as much as can be if and when the time comes.

Home or away

Life insurers will be keen to learn about anywhere further afield you may have travelled recently, and at the point of arranging a policy. While they would systematically turn a blind eye to your last jolly in Magaluf, they wouldn’t be in such a hurry to ignore details of any thrills and spills you enjoyed if the destination was a bit more far flung and exotic. Especially if the said destination had a history of tropical diseases and/or high levels of HIV infection, in which case getting life insurance might be somewhat fraught.

Similar to those who might class themselves as frequent business travellers, as this declaration can also prove problematic for those seeking all-encompassing life insurance plans. If agreed, you could be facing up to higher premiums to counter the risk.

…..and finally, what you’re worth

Or to be less vulgar, the income of the life insurance policy proposer. This is simply to evaluate if you could afford the insurance payments you’d be expected to meet, which is a fundamental concern for insurers from the off as often people forget to do the necessary math. Aha! We’re back to where we started, and the calculus. But never lose sight of the fact that by giving false or misleading personal information – or not disclosing all the information asked of you – could lead to any subsequent life insurance policy being officially rendered null and void.

So there you have it. The top and tail of how life insurance premiums are calculated, minus any pointless equations, pie charts, graphs or incomprehensible formulae.

To get more insight into how much your life insurance premium might cost, use our life insurance calculator.

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