How life insurance companies calculate how much you pay
Each life insurance company has its own set of underwriting criteria to determine whether or not to issue a policy and if so, how much to price it at. They will ask a series of questions to everyone who is interested in taking out a policy with them as this helps them to identify the risk they are taking on i.e. how likely they are to pay out.
Generally, insurers evaluate (rate on) the same factors when calculating premiums, but as no two risks are identical, prices can vary from one company to another. The cost of your premium will be affected by the sum assured, the length of the policy term, the cover and options bought, along with factors individual to you.
Some individuals will be considered a greater risk to insure because there are factors which the insurer considers may contribute to a premature death.
The main areas the insurer will look at are:
- Age - to assess longevity
- Gender - women generally live longer than men
- Height and weight
- Medical history - Some medical conditions may be considered a greater risk
- Family health history - generally looks at grandparents, parents and siblings
- Marital status and number of children
- Occupation - rates whether the occupation is ‘high risk’ e.g. armed forces, pilots, fishermen, offshore oil or gas industries, people who work at heights. Also looks at the percentage of manual work, heavy lifting and so forth
- Sports and hobbies - some pastimes are considered high risk e.g. climbing and mountaineering, hang gliding, motor sports, sky diving, skiing, horse riding, etc
- Smoking or tobacco use - smokers generally lead shorter lives due to proven links between smoking and some diseases, such as lung and throat cancer
- Alcohol consumption - excessive drinking can lower life expectancy
- Foreign travel - certain foreign travel may be rated as high risk
- The purpose of the insurance
- The amount of life insurance already held - people with more life insurance than they need tend to be considered a poor risk
- Income - determines suitability
Based on your answers to the questions they ask you, the insurer may either:
- Accept the policy on standard terms
- Request further information
- Request supporting information from you or a third party, such as a medical report or a Doctor’s letter
If the insurer requests further or supporting information then they will be entering a more involved underwriting process. As a result of this the insurer may:
- Accept the policy on standard terms
- Accept the policy on special terms
- Specify exclusions
- Decline to offer cover
The insurer may also adjust your premiums to reflect the level of risk you present. This may mean that your premiums increase from the original quotation or illustration you received.
Remember! Failure to disclose relevant information may affect your risk rating and could invalidate your policy.
What premiums are available?
There are two types of premiums available:
- Guaranteed premiums - once your policy has been accepted the life insurance company guarantees that your premium won’t increase during the policy term.
- Reviewable premiums - you agree that the life insurance company can review your policy at set intervals and as a result the premium you pay may change.
Although reviewable premiums normally work out cheaper in the short term they can be more expensive over the long term as they are likely to increase at regular intervals throughout the duration of the policy.
What are exclusions?
Based on the information you provided when you made your application, your insurance company may specify policy exclusions. An exclusion is a circumstance or event - such as a particular cause of death - that invalidates a claim. For example, if you suffered from depression before taking out the policy then the insurer may exclude death caused by nervous or psychiatric disorders.
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