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When it comes to life insurance, Americans are vastly underinsured.

Why is that?

Is it because they believe it to be too expensive? Is it because they think it’s confusing to understand? Well, today we’re going to explain the basic concepts of life insurance and talk about how much your life insurance may cost.

» Compare costs: Term life insurance quotes

What is life insurance?

Life insurance is a type of insurance in which you pay a certain amount (premium payments) to a life insurance company and in exchange they agree to pay a lump-sum payment (the death benefit) to your beneficiaries upon your death.

Most people have a need life insurance—but those who have the greatest need are parents with minor children. Life insurance’s main function is to replace the income of someone who has died. Your children rely on that income to survive—they can’t take care of themselves.

» Learn more: Does Everyone Need Life Insurance?

How are life insurance costs determined?

What you pay for life insurance is determined by your risk classification. Risk classification is the process of grouping together risks with similar risk characteristics.

People with similar levels of risk are placed in common rating classes and charged the same premium. The lower the risk, the lower the premium.

  • Actuaries are responsible for calculating the premium rates for each insurance company.
  • Underwriters are the ones who assess the individual applications to determine an applicant’s mortality risk.
  • Mortality risk is essentially determining a person’s probability of death based on a number of statistics.

» Learn more: What Are the Risk Factors that Affect Buying Life Insurance?

There are standard and substandard risk classes. Applicants with a normal or average risk profile will be accepted at standard premium pricing.

If underwriting determines that the applicant has a higher mortality risk than average, coverage may only be offered with substandard pricing – this is known as being table rated. According to Swiss Re, one of the world’s largest reinsurance companies, more than 85% of life insurance applicants are accepted at standard premium pricing and only 1-2% of applicants are ever refused coverage.

Life insurance underwriting ensures applicants don’t end up paying too much or too little.

All paid life insurance premiums essentially go into a big bucket that gets invested and accumulates interest. When an insured person dies, the life insurance company reaches into this pot to pay the death benefit.

It would not be fair for a 30-year-old cigarette smoking individual to pay the same amount of money as a 30-year-old who has never smoked. The cigarette smoker needs to pay more into the bucket since their mortality risk is greater.

Risk Classes
For Non-Tobacco UsersFor Tobacco Users
Preferred PlusPreferred Tobacco
Preferred
Standard PlusStandard Tobacco
Standard
Table Rating (alphabetical)Table Rating (numerical)Pricing
A1Standard + 25%
B2Standard + 50%
C3Standard + 75%
D4Standard + 100%
E5Standard + 125%
F6Standard + 150%
G7Standard + 175%
H8Standard + 200%
I9Standard + 225%
J10Standard + 250%

See what you’d pay for life insurance

Comparison shop prices on custom coverage amounts from the nation’s top carriers with Quotacy.

How much will I pay for life insurance?

Your premiums costs will be determined by the term length and coverage amount you apply for and your risk class. Your risk class is determined by your gender, age, health, family history, and lifestyle factors. “Lifestyle factors” can include your job, hobbies (avocation), alcohol use, and criminal record. For example, a deep sea fisherman has a higher mortality risk than a teacher.

» Calculate: Life insurance needs calculator

$250,000 20-Year Term Life Insurance Policy for 35-Year-Old Male
Preferred Plus = $13.54Preferred Tobacco = $47.30
Preferred = $16.54
Standard Plus = $20.52Standard Tobacco = $65.01
Standard = $24.02

Women statistically live longer than men, so they pay less on average for life insurance coverage. Take a look at the table below and compare the premiums to the previous table. I used the same criteria to calculate premium costs, except I changed the applicant to a female instead of male.

$250,000 20-Year Term Life Insurance Policy for 35-Year-Old Female
Preferred Plus = $11.82Preferred Tobacco = $39.10
Preferred = $14.58
Standard Plus = $17.97Standard Tobacco = $52.90
Standard = $20.08

Your age is the most important risk factor used to calculate basic premium. As your age increases, your mortality risk increases.

Don’t wait to buy life insurance, because the longer you wait, the more your insurance will cost. Take a look at the table below.

Average Annual Cost of a $250,000 20-Year Term Life Insurance Policy for a Healthy Non-Smoker
AgeMaleFemale
25$169$148
30$173$153
35$183$163
40$244$211
45$361$298
50$542$418
55$853$634
60$1480$1069
65$2578$1841

If you aren’t sure how much life insurance you need, try using our handy dandy life insurance needs calculator. It’s easy to use and the questions aren’t complicated, unlike some online calculators you may come across.

If you already know how much life insurance coverage you want to purchase, you can go straight to our term quoting tool. No contact information required until you’re ready to apply.

Note: Life insurance quotes used in this article accurate as of December 7, 2020. These are only estimates and your life insurance costs may be higher or lower.

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius, CLU

Senior Editor and Life Insurance Expert

Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.