So what sets the premium rate for life insurance when you apply? Your mortality rate determines your premium amount for life insurance.
Essentially, it boils down to what you need to pay for the product in order for the insurer to gain benefit from selling you their product.
It may sound rather morbid, but this is what actuaries do and insurance companies rely on their mortality tables to decide how much you should pay for life insurance.
Whether it is concerning your job, gender or physical condition, risks affect your life and your insurance premium.
Before an insurance company can rate a policy, they have to place applicants into the right classifications, noted Edward E. Graves, author of “McGill’s Life Insurance.” Factors like age, family history, residence, habits and economic status all go into how much you will pay for life insurance premiums—or if you will be issued a policy at all.
But when you consider risks, it makes sense that not all people should be offered insurance on the same terms. For instance, should nonsmokers and smokers have the same rates? Based on mortality rates for people who smoke, insurance companies have not surprisingly raised premiums for those in that category.
As a result, insurance companies must establish a range of mortality expectations and risks to determine rates.
For an insurance company to be successful, they must maintain a balance of risks and rate classifications on both ends of the spectrum. If risk underwriting is too conservative or liberal, the company may lose business to competitors. You can learn more about underwriting policies on the New York Life website.
There may be some unavoidable disparities in the risk classification system because everyone’s situation is different, and each classification must be broad enough to include a variety of risks. The challenge for insurance companies is to avoid creating extreme unfairness between policy owners based on risk tables that are too narrow or stringent.