How are life insurance rates calculated?
Answer:
To many Americans... this seems to be a mystery. 
This fact continues to be made apparent to me.  For the past several weeks I've been communicating by e-mail with a prospective customer looking for life insurance in Los Angeles.  I attempted to have at least one telephone conversation with her, only to be given the cold shoulder when I started asking health questions.  She politely stated that she preferred to communicate via electronic messages and I agreed to accommodate her.  Today, I received an e-mail that told me I would have my work cut out for me for Lola in LA.  She gave clear signals that she had no idea how life insurance quotes and, consequently, actual life insurance rates were calculated.  I knew it would take more than e-mail conversations to help her when she said...


"I don't like the thought of someone asking personal questions... Unless they don't get too in-depth..."  My response wasn't as detailed as this post, because my next step with Lola is to coerce her to talk to me.  The e-mail method of communication has run its course.  Accurately quoting life insurance rates requires some know-how and it requires that the person seeking coverage share information.  Think about it... you could be asking an insurer to pay your spouse, son, or daughter $1,000,000 (for example) if you die.  Do you think they deserve to know about your medical history?  Especially since the terms of a traditional life insurance policy will allow your beneficiaries to be paid the full face amount of your plan the same day it goes in force.  So here are some basics about how life insurance rates are calculated:
  • Age...  Obviously, the older you are, the more expensive the coverage.  You'll find that the way the statistics shake out, most life insurance companies aren't banking on your survival much past your late 60's.  Rates increase dramatically at that point.  The moral of the story is that you should purchase coverage when you're young and don't let it lapse.  Procrastination can cost an arm and a leg.
  • Health... This is huge.  And this is also where Lola needs to listen up.  Her fear and apprehension with regard to discussing her health is a red flag for me...  Right away I'm thinking... what's physically wrong with this person?  Any imperfection in your health can add up to an increase in rates.  Some conditions are just plain not insurable at any price. 
  • Life Style... My favorite question to ask applicants for life insurance is whether or not they like to jump out of perfectly good airplanes or SCUBA dive.  These are fine examples of risky life styles or "hazardous avocations" as they're called by life insurers.  Other hazardous avocations or life style choices people can make to impact their rates are:
*Tobacco/Nicotine use.  Smoking cigarettes is one of the biggest factors in determining life insurance rates. Some insurance companies look at other forms of tobacco in a more favorable light but all seem to agree that smoking cigarettes is not good for longevity.  Chewing tobacco or "dip" is also viewed mostly as a very negative factor.  Some companies, like Midland National Life Insurance Company and Prudential Life Insurance Company , have a "non-smoker" class for which applicants may qualify even if they dip.  Likewise, American General Life Insurance Company (AIG) will give special dispensation to those who smoke cigars, admit to not smoking more than one per week on a life insurance application, and who demonstrate a nicotine metabolite free result in a blood test when their medical exam is completed.  The best rates come to those who have been off nicotine for at least 5 years.  If you do smoke, I've found the best smoker rates are usually offered by a company called RBC Liberty Life Insurance Company .  I say usually... there are others that have demonstrated the desire to be competitive when it comes to those who don't want to give up the smokes.  A reputable broker will have a wealth of options to present to you and will use a complete snapshot of your risk factors to make a company recommendation.
*S.C.U.B.A.  Insurers will want the details of this activity fleshed out in a Hazardous Avocation questionnaire.  Based on your answers, they may decline coverage, add a flat fee for every thousand dollars worth of coverage, or take no action at all with regard to your rates. 
*Flying.  This activity will generate more paperwork just as S.C.U.B.A. does.  If you're a pilot, American General and Genworth Life Insurance Company have favorable pilot life insurance rates.  But they'll want to know details.  If you're a professional commercial pilot with a major airline, you may enjoy little to no impact on your life insurance rates with these companies.
*Bull riding, bungee jumping, sky diving, race car driving, boat racing... again... all activities that cause insurance companies to bristle at the thought of providing coverage in the face of such inherent risk.  The best course of action is to consult a broker with the ability to shop dozens of companies on your behalf if you like to participate in dangerous extreme sports and activities.
*Foreign travel.  Planning on going to Iraq for a little R&R?  Don't bother applying for life insurance.  In general, life insurance companies will use the State Department's travel warnings as guidance when it comes to making an offer for coverage.  They could choose to offer coverage if you're planning a trip to South America for example... but if you're going to a locale with an active travel warning, you can either expect the aforementioned additional flat fee or a declination.

After answering a range of questions about your age, health, and life style, a life insurance agent or broker will attempt to place you in a "health classification".  Every health class has a cost factor associated with it for your age.  Here are the basic health classes:
  • Preferred Best or Super Preferred:  You're perfect... don't change a thing.  You take no medications, your height and weight are proportionate, you have no issues with cholesterol, blood pressure, family history, and you have a clean record when it comes to your credit, moral fiber (no criminal offenses), and driving history.  You deserve the best rates because you take care of yourself, have good genes, don't use nicotine, and don't do anything crazy with your spare time or for work.
  • Preferred:  You're in good shape... but perhaps you take medication to control blood pressure.  Maybe you're slighly overweight, have slightly elevated cholesterol levels, or have a skeleton in your closet when it comes to family history.  Preferred is good... but some very minor risk factors are present.
  • Standard Plus:  You're just slightly above average.  Height and weight loom large here as does the spectre of adverse family history.  Maybe everything about you is perfect... but you've only been off nicotine for 2 years.  This is the health class for you if that's the case.
  • Standard:  You're average all the way.  Again... you may be perfect with the notable exception that you only quit smoking one year ago.  I've found most people qualify at this level when they have issues with their weight. 
  • Preferred Tobacco and Standard Tobacco:  This is why smoking rates are usually significantly higher.  You're placed in the smoking category regardless of how good your health is otherwise and charged accordingly. 
  • Table Ratings:  Life insurance applicants are placed in the table rating category when unqualified for the more favorable basic health classes.  Perhaps you have diabetes, you qualify as obese, you were once treated for cancer or another serious illness... Table ratings are given numbers or letters.  Usually they start at Table B (also called Table 2) and progress through to Table H (also called Table 8).  As a rule of thumb, the rates increase by roughly 25% for every rung on the Table rating ladder. 

When getting her rate on-line, Lola called herself "Preferred Best".  Her fear of discussing her health history speaks volumes about how much she actually tried to figure out what her likely outcome will be.  If she is perfect, why would she be reluctant to discuss her health with me?  This is the danger of generating quotes for yourself on-line.  If you don't know the basics when you're presented with rate options over the Internet-- of course you'll pick the lowest priced life insurance quote you see.  Most on-line quoting engines provide the means for you to drill in and get information on the available health classes, but unfortunately most people ignore the tools and expect the best rates. 

I've provided alot of information here, but there is even more that I haven't discussed.  Calculating life insurance rates can be complex when there are mitigating risk factors and very simple when there are none.  But since very few people can count themselves as perfect-- you should know that life insurance rates are not written in stone until you've gone through the application, medical exam, and underwriting process and been made an offer.  A good agent will tell you that... and he or she will not sugar coat your potential outcome with a low ball estimate of what you can expect to pay. 

Lola in LA needs to understand that I need to ask questions to put my best foot forward to offer her the best life insurance rates in Los Angeles.  This all starts with an honest discussion... and yes Lola... in-depth is good.  So talk to your agent, assess his or her knowledge and experience with some tough questions of your own to build a comfortable level of trust.  Once you've done that and feel the rapport is there, encourage your agent to do the necessary work for you to provide the best available rates on your behalf.  Generating your own life insurance rates on-line can provide a good guideline-- but there's no substitute for real life feedback from an experienced agent.
  more Q&A sessions like this

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written by Chuckles , June 13, 2007

Yes, too many people think that insurance premiums are a made up number that is negotiable when in fact actuaries and underwriters get paid to specifically calculate risk. These risk calculations, based on what you said is what determines rates.


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