When it comes to determining the premium rates associated with different types of life insurance policies, there are a few factors that the companies usually take into account.
Two of the most important are interest and mortality. In addition, cost is another deciding factor that has a lot to do with insurance policy premium rates, especially in the case of life insurance. It can be referred to as the sum of money that the insurance company is supposed to add to their costs to cover various types of overhead costs such as operating costs of the business, investments due to premiums and for paying the huge amounts of money for claims filed by different customers. Some details about these factors are discussed in the sections below.
The essence of a life insurance policy can depend on a large group of individuals communicating the death risk of the insured. To make a predicted calculation of the costs that each member of the group should be responsible for, the insurance companies normally try to calculate the risks that the insured will die in the coming years. Mortality tables are very useful in this regard, as they give insurers a baseline estimate of the amount they would have to pay annually due to death claims. By using mortality tables, life insurers usually find out the median life expectancy for different age groups.
Interest is the second most important factor in calculating premium rates in interest earnings. The amount of money paid by the customers is usually invested by the insurance providers in various types of opportunities such as real estate, mortgages, stocks, bonds, etc. The idea behind these investments is to earn a nice amount of money that can be adjusted on account of interest for the invested funds.
Cost is the third most important consideration when it comes to determining life insurance premium rates. Costs refer to the operational costs of the company to run it optimally. These costs are usually estimated by the insurance company based on various costs such as salaries, postage, legal fees, rent, agent fees, etc. The total amount charged to a policyholder for operating expenses is normally referred to as expense allowance. It can be thought of as a variable cost area that can differ for different insurance companies based on their efficiency and cost.
In addition to the above factors, there are a few others that have a small effect on the cost of life insurance premiums. For example, the time of year in which you take out insurance also influences the total price. Following a general trend, life insurance can be purchased at a relatively lower price if you sign up in the first quarter of the year. This is because most insurance companies use mortality and age charts to determine the rates of different policies. Consider the example below to get a better understanding of this.
If the insurance premium for a 60-year-old is $70.00 per month, it could be $75.00 for a 60-and-a-half year old, while the premium for a 61-year-old could be as much as $80.00. To put it more simply, it is highly recommended that you take out life insurance earlier in a year as according to the age charts you could fall into an age group with older people if you wait just a few months and your premium rates could eventually increase as well.