Term Life Insurance Articles
How Probability Is Used To Calculate Term Life Insurance Rates
2010-06-07
All insurance companies operate on the basis of risk, and life insurance companies are no different. When term life insurance rates are calculated, one of the most important considerations is the probability of the insured dying before the term is up. The higher this death probability is, the higher that the term life insurance premiums will be. In rare cases where this number exceeds the amount the company stands to make, no insurance will be offered at all. Although not all companies use the same methods to determine this probability, there are a number of calculations that remain consistent across the industry.
The first is the current condition of the potential insured, beginning with age. Generally, the younger an individual, the less likely they will die during the term of a policy. An exception to this might be a young man of sixteen or eighteen who, by virtue of his new driver's license, may have a higher-than-average chance to die. Still, his rates would be lower than a seventy year old man, simply based on statistics. Next comes any current health issue such as diabetes, cancer, or MS. A condition which carries with it a prognosis of death at a young age will naturally increase the premiums on any term life insurance.
Next, companies will asses the habits of their client, and any past behaviors which could lead them to be a greater risk. Heavy smokers, drinkers, and drug users will represent a far higher risk of dying within a policy's term, and their rates will be adjusted accordingly. It is also in this part of the death probability calculation that pre-existing genetic conditions or diseases are examined. An obese thirty year old man, for example, has a far higher chance of medical issues such as a heart attack or stroke than a man of similar age but far less weight. In addition, insurance providers will also consider potential future conditions. If a client's entire family has an iron deficiency disorder which gets worse with age, that will likely come into play as a factor in determining their chance of dying during the term.
In short, the more ways in which a policyholder could potentially die during the term they are insured, the more expensive the policy will be. Some companies will still ask for a medical background check as well as current test results, but will offer lower rates if it can be determined that the client is in good health. Some offer benefits with no exam, but at a far higher cost. The less overall risk presented to a company by a client, the lower any term life insurance quote will be.
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All insurance companies operate on the basis of risk, and life insurance companies are no different. When term life insurance rates are calculated, one of the most important considerations is the probability of the insured dying before the term is up. The higher this death probability is, the higher that the term life insurance premiums will be. In rare cases where this number exceeds the amount the company stands to make, no insurance will be offered at all. Although not all companies use the same methods to determine this probability, there are a number of calculations that remain consistent across the industry.
The first is the current condition of the potential insured, beginning with age. Generally, the younger an individual, the less likely they will die during the term of a policy. An exception to this might be a young man of sixteen or eighteen who, by virtue of his new driver's license, may have a higher-than-average chance to die. Still, his rates would be lower than a seventy year old man, simply based on statistics. Next comes any current health issue such as diabetes, cancer, or MS. A condition which carries with it a prognosis of death at a young age will naturally increase the premiums on any term life insurance.
Next, companies will asses the habits of their client, and any past behaviors which could lead them to be a greater risk. Heavy smokers, drinkers, and drug users will represent a far higher risk of dying within a policy's term, and their rates will be adjusted accordingly. It is also in this part of the death probability calculation that pre-existing genetic conditions or diseases are examined. An obese thirty year old man, for example, has a far higher chance of medical issues such as a heart attack or stroke than a man of similar age but far less weight. In addition, insurance providers will also consider potential future conditions. If a client's entire family has an iron deficiency disorder which gets worse with age, that will likely come into play as a factor in determining their chance of dying during the term.
In short, the more ways in which a policyholder could potentially die during the term they are insured, the more expensive the policy will be. Some companies will still ask for a medical background check as well as current test results, but will offer lower rates if it can be determined that the client is in good health. Some offer benefits with no exam, but at a far higher cost. The less overall risk presented to a company by a client, the lower any term life insurance quote will be.
