How is the term life insurance cost determined?

Unlike permanent life policies which have the cash-value element, term life insurance policies are much simpler. The term life insurance cost is determined by the correlation between two components: the policy expense cost and the mortality cost.

The policy expense costs

This is the term life insurance cost component that stays relatively constant, and includes the company's expenses that you need to pay, such as management fees, agent commissions (if applicable), medical exam fees and underwriting expenses. Term life insurance expense costs are usually much lower than the expense costs of cash-value life insurance.

Mortality cost

This is the variable component that affects and accounts for the changes in term life insurance costs. It is determined by your chances of dying at any given moment. As you get older, your mortality cost increases proportionately, and so does your term life premium.

With term life insurance, companies only pay benefits if the policy owner dies while the policy is in force. To determine the probability that they will have to pay death benefits, insurers use actuarial statistics, and the more likely it is that the applicant will die, the higher the premiums.

How Are Term Life Premium Costs Determined

Insurers extract information about the condition, lifestyle and habits of each applicant. The factors that contribute to determining the term life insurance costs, are as follows:

• Age: the younger you are, the lower the premium rates. As you grow older, term life insurance costs increase.
• Sex: Women usually are eligible for slightly lower premiums because their life expectancy is higher than that of men.
• Tobacco use: this is one of the major factors that affect term life insurance costs. A smoker is likely to pay up to four times more than a non-smoker.
• Weight: applicants who are overweight cannot qualify for preferential premiums.
• Medical history: your health matters, so if you have had conditions in the past, you need to provide evidence that you have controlled them.
• Lifestyle: This includes habits such as drug or alcohol abuse, driving record, hazardous hobbies and activities and travel.

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