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September is Life Insurance Awareness Month. An entire month dedicated to bringing this awareness is needed because 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 percent of life insurance applicants are accepted at standard premium pricing and only 1-2 percent 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.

 

Standard Risk Classes
 Preferred Plus (lowest risk)
Preferred
Standard Plus
Standard

 

 

Tobacco Risk Classes
 Preferred
Standard

 

 

Substandard Risk Classes

a.k.a. Table Rating

Pricing
Table AStandard + 25%
Table BStandard + 50%
Table CStandard + 75%
Table DStandard + 100%
Table EStandard + 125%
Table FStandard + 150%
Table GStandard + 175%
Table HStandard + 200%
Table IStandard + 225%

 

 

What you pay for life insurance is determined by your risk classification. People with similar levels of risk are placed in common rating classes and charged the same cost for life insurance. The lower your risk, the lower your cost for life insurance will be.

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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

 

The Average Monthly Cost of a
20-Year $250,000 Term Policy
for a 30-Year-Old Male
Based on Risk Class
Preferred Plus$16
Preferred$20
Standard Plus$24
Standard$28
Preferred Tobacco$50
Standard Tobacco$64
Table A$35
Table B$42
Table C$49

 

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.

 

The Average Monthly Cost of a
20-Year $250,000 Term Policy
for a 30-Year-Old Female
Based on Risk Class
Preferred Plus$14
Preferred$17
Standard Plus$19
Standard$24
Preferred Tobacco$40
Standard Tobacco$50
Table A$30
Table B$36
Table C$42

 

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.

 

The Average Monthly Cost of a
20-Year $250,000 Term Policy
for a Male Based on Age and Risk Class
Risk ClassAge 20Age 30Age 40Age 50Age 60
Preferred Plus$15$16$22$53$150
Preferred$19$20$27$63$179
Standard Plus$23$24$33$77$200
Standard$27$28$40$96$244

 

Note: I calculated the premiums for the above examples by adding the monthly costs from 12 different life insurance carriers and dividing them by 12 to get the average. Your premiums could be lower or higher than these examples.

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.

» Compare: Term life insurance quotes

 

Photo credit to: NeONBRAND

 

 

About the writer

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

Natasha Cornelius

Writer, Editor, and Co-host of Quotacy's Q&A Fridays

Natasha is the content manager and editor for Quotacy. She has been in the life insurance industry since 2010 and has been making life insurance easier to understand with her writing since 2014. When not at work, she's probably studying and working toward her Chartered Life Underwriter (CLU) designation while throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on. Connect with her on LinkedIn.