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Life Insurance Premium calculation: The process and the criteria

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Life insurance is a means of saving for your future life. Purchasing life insurance means paying a certain amount of money each year. In terms of life insurance premium calculation, many insurance purchasers are still confused. It is understandable since many factors determine the calculation process.

What is Life Insurance Premium?

Life insurance premium is the amount the policyholder pays to receive the benefit the insurer confers on the occurrence of the scheduled eventuality. There are two main types of life insurance premium: net/pure premium and gross/office premium.

Net premium are the money paid to pay the insured. Factors affecting net premium include life expectancy of the insured, the deposit interest rate, and other factors, namely insurance term, the sum insured, premium payment method (one time or in installments), etc.

Gross premium are the net premium plus the costs for propaganda, advertising, brokerage, agency, contract management expenses during the contract period, and other extra compensation payments.

Typically, the premium that you have to pay for the insurance company are the gross premium. Insurance companies have slightly different ways of calculating additional costs, leading to premium differences from company to company.

What Factors Impact Your Life Insurance Premium?

As previously mentioned, the life insurance premium calculation done by an insurance company is determined by different factors. The company’s underwriters will ask you questions about the coverage type and amount you need, personal information, health, lifestyle, etc.

Coverage Type & Amount

There are two common kinds of life insurance, namely whole life and term life insurance. The policy you select impacts how much your premium payment will be. Specifically, a term life policy is only effective for a certain period, usually 10, 15, or 20 years. Hence, whole life insurance with cash value feature charges you higher premium.

In addition, the coverage amount you purchase plays a part in deciding your premium. It makes sense when for the same type of term life insurance, your premium for $500,000 coverage are much higher than those of $250,000 coverage.

Your Personal Information

Generally, your personal information such as your age, gender, occupation also affects the underwriting process by which the company calculates your premium. Keep in mind that the older you are, the high risk the company may experience when insuring you so that they will charge you higher premium.

For example, a 25-year-old man can achieve a $500,000, 10-year term-life policy issued by Manulife, with a monthly premium payment of about $20. Meanwhile, a 35-year-old man has to pay about $28 monthly for the same coverage. That’s a difference of nearly $960 during the life of the policy.

Your Health & Lifestyle

Your health is also an element that the insurers use in their life insurance premium calculation. Specifically, your pre-existing conditions or heavy use of tobacco will impact your premium. Besides, your occupation and hobbies are also asked by the underwriters. For instance, if you are a roofer, you can expect to be charged higher premium rates than a university professor or an accountant. If you prefer thrilling and risky hobbies, you are also likely to pay a higher premium than those collecting stamps.

How is Life Insurance Premium calculated?

After the underwriting process is finished, the insurance companies will resort to actuaries, who will assess financial risks using mathematics and statistics. These professionals will create an actuarial table consisting of three key elements: the mortality rate, management expenses, and expected investment.

Since the rate of mortality rises in proportion to the age, the insurers will charge a level premium (monthly, half-yearly or annual) that stays the same over the whole duration of the insurance term. Regarding the management expenses, the insurer needs to incur costs for carrying out its insurance business. These expenses, such as commissions to agents, incidental expenses, etc., may vary and be subject to inflationary market conditions.

While those two elements raise the premium rates, the expected yield on investment of the collected premium may help reduce premium. However, since the future yield is not determined precisely, the insurers are very prudent and reserved for the possible fall in the yield rate.

From the above information, the insurance company will calculate the amount of money it needs to charge the policyholder to ensure it makes sufficient money to pay your potential claims and earn profits.

The Final Thought

In a nutshell, the life insurance company depends on many factors to decide your premium. After all, it’s all about risk. What is the degree of risk that the insurer has to take when proving you an insurance policy? The underwriters and the actuaries help to answer that question. And their answers affect your premium rates: The higher risk you pose, the more premium you have to pay.

Frequently Asked Questions

What are whole life insurance riders?

Life insurance providers often offer riders as optional benefits to your whole life policy. A rider is an additional part of your initial primary contract as other specific needs you want to tailor your package with. Some of the most common riders include: 
– Disability income rider: should you become permanently disabled, this rider provides you with regular stable income from the insurers 
– Accidental death benefit rider: if you, unfortunately, die in an accident, this rider pays your beneficiaries 
– Living benefits rider or accelerated death benefit: this rider is offered when you are diagnosed with a critical ailment or have limited longevity (e.g., a year), and it will pay you a part of your death benefits even when you are still alive 
– Long term care (LTC) rider: depends on the terms and conditions; this pays for your long term care expenses 
– Level term rider: adds a specified amount of term life insurance to your present whole life policy 
– Policy purchase option: allows you to purchase additional coverage without the need to examine insurability, for example, after you have a newly born child.
– Waiver of premium rider: in the case you become disabled or jobless, this rider allows you to terminate your premiums (terms and conditions vary)
Riders are typically not free, and experts advise that you should only accept them when essential as they can reduce your overall cash value potential. Also, they are not offered by all insurers, so if you are interested in these add-on features, especially with specialized ones, consult your providers to find out. 

What is the Return of Premium Life Insurance, and how does it work?

Return of Premium Life Insurance is a policy that allows you to pay a flat rate during the time of your term life coverage but won’t leave you empty-handed after its expiry date.
Of course, this type of insurance is usually 30% more expensive than the traditional term coverage. If you can afford it throughout the duration and benefit from the built-in savings mechanism, then the Return of Premium Life Insurance is definitely for you. Later on, when it ends, you will get all your money back thanks to your faithful, consistent payments.
However, few insurance providers offer Return of Premium Life Insurance coverage, so you should check with yours before getting a quote.
If you terminate your policy before it ends, it depends on your insurance provider and their terms to pay you back parts of your premiums. In general, the longer you own your coverage (possibly outlive it), the higher chance you will receive your premiums.

Why do some people cash out their Life Insurance policy?

Even though Life Insurance premiums provide you and your beneficiaries with a lot of financial support, it is inevitable that sometimes you might consider using the policy’s cash value. Some reasons for cash-outs include: 
– You have found an insurance company with better options that suit your changing lifestyles 
– You no longer require coverage as maybe your beneficiaries have passed away or they do not need your financial support anymore 
– You have other significant financial priorities that demand quick cash payments (e.g., buying a new home, paying for your child’s tuition fees, etc.) 
– You have debts, but you want lower interest rates than banks/ credit cards, or you have low credit scores. 
– You wish to reduce your premiums by using some of the cash value to cover them. 
There are multiple reasons why you need to cash out your policy but of course, always remember to consult your insurance broker or your accountant/ financial advisor to decide if you need to and if there are any other alternatives. 

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