How do insurance companies calculate life insurance rates?

Insurance companies use 3 primary factors to determine how much their rates for insurance have to be in order for the company to be profitable. These statistical tables are Mortality, Interest, and Expense. Mortality tables provide basic information on how long a person is expected to live. Interest tables let the insurance company gain an idea of how the interest earnings can be expected to perform. Finally, the expenses of the company must be factored in, including the cost of employee wages, advertising, and other overhead.

Individual life insurance policies typically cost more than group policies, because the policy group is small, and each person must effectively contribute enough to cover the full costs of their own policy. To calculate the cost for customers, the insurance company will look at a number of factors relating to each person. While the exact calculations used may differ from one company to another, the following is a general list of what insurance companies will use to determine your premiums.

• Age - Your age when you purchase the policy will have a direct effect on the cost of the policy. Buying while you are young will mean you pay lower rates for the duration of the policy.
• Health - Your health is probably more important than your age, because a person in relatively good health can be expected to live for the time described in mortality tables, while a person who suffers from health conditions may not live as long.
• Personal Demographics - Just about everything about you may have an effect on your life expectancy, including your marital status, occupation, and the place where you live, among many others. Depending on the type of policy you buy, some of the personal demographics can be extrapolated by company statistics.
• Face Value - The face value of the policy is important because the insurance company has to be able to earn the value of the policy across the group of life expectancies. The more your policy is worth, the more your premiums will be, regardless of all other factors.
• Policy Type - Purchasing a term life insurance policy is less expensive than a permanent or whole life policy. This is because the insurance company is at a lower risk level, because there is a good chance that the policy owner will outlive the policy and the insurance company will not have to pay a settlement. Similarly, different types of permanent policies will cost more or less. A universal life policy is one of the most expensive types, because you also have to pay for policy upkeep, premium investment, and other associated costs.