Fact CheckedHow are life insurance rates determined? If you want information about life insurance’s cost, congratulations! You are 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.
The difference lies in the underwriting process. Insurers use this procedure to determine the risk associated with providing coverage.
Always remember life insurance is a business. These companies want you to live to the end of your term, so they do everything possible to determine your lifespan.
So, let’s take a peek under the hood to see how this works right now.
STEP 1:
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 some time or a term in increments such as 10, 20, and 30 years. Once the term is over, your coverage stops. Remember, there is no guarantee that your beneficiary will receive 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 a medical exam. The 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. Based on your health, lifestyle, etc., they decide your accurate rating class. 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. However, simplified life insurance requires you to answer several questions to qualify.
For this article, we are talking about traditionally underwritten coverage.
What Type of Insurance Should You Pick?
One of the significant 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 an excellent chance you will live beyond the end of your term, making the premiums much less expensive.
If you want coverage until your death, you must select permanent insurance, which is much more expensive.
Term life insurance is usually suitable for most people. It protects you during your most vulnerable years.
However, permanent insurance may be suitable if you have an estate, business interests, a dependent with special needs, and/or a cottage you want to pass on. 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 coverage, assessing your future needs is essential.
Terms typically come in 10, 20, and 30-year increments. You don’t want to insure unnecessary periods, but locking in rates when young and healthy is brilliant because coverage gets more expensive as you age. 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.
If you wait too long, you may even become uninsurable.
I tend 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 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 see me, they usually have a number in mind.
Whether they select a term or permanent life insurance, they must choose the amount of coverage. For permanent insurance, the numbers are usually lower simply because the cost is much higher. Clients pick coverage from $25,000 for a final expense policy up to $1 million-plus if they have an estate.
Higher face values are more affordable for term insurance, so more clients purchase more comprehensive coverage.
Typical face values for term insurance are $100k, $250k, $500k, and $1 million.
While $100K may sound like a lot of money, it’s not. If you use the life insurance proceeds to cover a shortfall due to lost income, this money evaporates quickly.
We recommend anywhere between 7 – 15 times your gross income as a guideline.
STEP 2:
Meet With Your Agent to Answer Health & Lifestyle Questions
This is a crucial part of the life insurance process. First, 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. This 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 can access Canada’s best life insurance companies for the most affordable policy.
This can 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 questions. Your answers give the insurance company important information about your lifestyle and health.
It’s vital to be honest. Do not think that leaving out little details gets you a better rating. First, the more honest you are, the more iron-clad your coverage will be. If you leave anything out, it can and will come back to haunt your beneficiary (the 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 consider leaving out information, lying, or making something seem less problematic 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 jobs, and the information will surface one way or another.
If it doesn’t, it may bite your beneficiary in the bum. Investigations of claims DO happen if it’s made in the first two 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.”
Lying On Insurance Policy Leads To Big Problems, Diamond & Diamond
STEP 3:
Take the Physical
Once you submit your application, your agent schedules an appointment with a nurse to conduct 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.
It takes less than an hour. Many of my clients are worried that something catastrophic will be revealed during this exam. Nothing could be further from the truth. More often than not, everything is just fine. Most people are pleasantly surprised when they get their results back.
STEP 3:
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 person 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 that life insurance companies use to allocate your premium (or the amount you pay monthly, yearly, or 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 an exceptional rating; you will pay less than someone who 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 severe medical issue that does not make you uninsurable. For example, if you have childhood diabetes, you will be rated. This means the life insurance company charges you more because the risk of insuring you is high.
- Postponed: You may have outstanding medical tests or an issue that the insurers need more time to clarify.
- Declined: You have serious medical issues, and the insurer is unwilling to cover you.
STEP 4:
Choose Your Life Insurance Company Well
This should be at the top of this list. It’s one of the most important decisions you make and GREATLY impacts the amount of money you spend over your policy term.
I put this here to show you what can happen if you make the wrong choice.
If you pick a company that is tough on weight, you may get a different rating than you would have from an insurer that is lenient on weight.
What does that mean? A lot. Let’s say you received a standard rating from the company you applied to but would have received a preferred rating from the one you overlooked. The difference in what you pay over 30 years is notable.
Example
BMO
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.
Wawanesa
The same 30-year-old non-smoking male in good health applies to Wawanesa Life and receives a preferred rating. He pays $40.50 per month for the same 30-year term policy.
Total savings for picking the right company: $1,944
The Cost Gets Higher the Older You Get
BMO
My client, now a 40-year-old, non-smoking male in good health, applied to BMO and received a standard rating. He pays $91.80 per month for a 30-year term.
Wawanesa
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
How Are Life Insurance Rates Determined? Call Us Now to Find Out!
If you are googling – how are life insurance rates determined, I hope we were able to answer your question.
Do you want some GREAT news? Life insurance advice from Policy Architects is entirely free.
Yep. The beauty of working with an independent agent is we walk you through the process and find you the best company without any strings.
So, if you’re wondering how life insurance costs are calculated for you, we can help.
