The Price Is Right? Understanding How Term Life Insurance Premiums Are Priced

The price of term life insurance radically dropped in the mid-1990s, though none of the usual suspects related to falling costs had changed. Indeed, there were no major shifts with insurance companies, brokers, or customers, nor was there a commensurate decrease with other types of insurance (auto, home, or health). Unravelling this mystery of plummeting costs is directly related to understanding how term life insurance premiums are priced.

As described by Steven Levitt and Stephen J. Dubner, the authors of the bestselling book Freakonomics: A Rogue Economist Explains the Hidden Side of Everything, the falling prices coincided with the rising popularity of the internet. Suddenly, the prices of multiple companies could be easily compared and contrasted. Insurance providers were forced to lower their prices when this information became accessible online, and the personal finances of consumers benefitted.

What Is Term Life Insurance?

Term life insurance is a financial arrangement between an individual and a company. In exchange for regular premium payments, the company agrees to pay a death benefit to the individual’s family if they pass away during a specific period of time.

The timeframes vary, but the most common periods are 10-, 20-, and 30-years. There will be no benefit paid if the individual outlives this predefined term, hence the name of this type of policy.

Unlike whole life insurance, there is no residual value for term life insurance. In this sense, term life insurance is like other types of insurance products such as auto, house, and healthcare, when a benefit will only be paid if an incident occurs that triggers the coverage.

Term life insurance can be a economical way to protect one’s family if the catastrophic occurs. The death benefit is directly tied to the amount of the premium payments, with higher premiums corresponding to a greater death benefit.

There are a number of ways that individuals can calculate the amount of money they wish to leave for their beneficiaries. One straightforward way is to multiply their current salary by a factor of ten (the 10X rule). Another method is to compile their amount of Debts, Income, Mortgage, and Education expenses (the DIME approach).

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How Are Term Life Insurance Premiums Calculated?

Insurance companies will evaluate both your desired death benefit as well as a number of additional considerations about your individual circumstances to determine your prospective premium payments.

Not surprisingly, these relate to the likelihood that they will eventually need to make a death benefit payment. Here are some of the most common considerations:

(1) How Old Are You? Those who are in their 20s and 30s will generally be able to find cheaper term life insurance policies than those who are purchasing policies in their 40s or 50s.

(2) What Is Your Gender? Women have a longer average lifespan than men, and therefore their term life insurance premiums can be slightly cheaper.

(3) Are You a Smoker? Smoking is bad for your health, and it follows that if you are smoker your premiums will be more expensive.

(4) How Is Your Overall Health? A healthy individual, especially one without a family history of the early onset of disease, will likely be able to secure cheaper premium payments for their term life insurance. For this reason, many insurance companies will offer better deals to those individuals who are willing to take a medical exam.

(5) Are You a Good Driver? Auto insurance increases for those with a history of reckless driving–i.e. getting busted for a DUI. This will also impact your premium payments.

(6) Do You Have Other Risk Factors? There are certain professions (i.e. trapeze artist) and hobbies (i.e. cliff diving) which can make your life riskier to insure. This will also likely cause you to pay more for your term life premiums.

How Did the Internet Affect Term Life Insurance Prices?

In the 1990s, as websites began making pricing information regarding term life insurance so readily available, anyone with an internet connection could quickly understand which companies were offering the best packages. The spread of this information proved to be a direct benefit for consumers, and according to Levitt and Dubner, this lowered premium payments throughout the market by some $1 billion every year.

Every insurance company has their unique evaluation process, considerations, and price structure. That being said, term life insurance is a fairly straightforward financial product, and companies by-and-large conduct similar considerations during the underwriting process. Therefore, the price of premiums is a central factor when deciding which policy to purchase.

Before the advent of these comparison websites, individuals would have needed to engage with multiple insurance agencies to understand their most economical option. This process is time consuming and annoying, and most individuals possessed neither the time nor the patience to conduct this research.

The availability of information has only increased in the years since, and there are multiple websites on the internet where shoppers can compare, contrast, and understand the various policies offered by different life insurance providers.

Conclusion: Research Your Options

There are plenty of life insurance companies to choose from, each with their own unique advantages and benefits. While price is a central factor, there are other items to consider as well, such as the reliability of the insurance company and customer satisfaction, among others.

Like almost every personal finance-related decision, there are always trade-offs implicit in any choice you will make. Purchasing term life insurance is no exception, and it behooves you to look online, consult within your social circle, and even speak with a few providers and insurance agents to find the best situation for your term life insurance needs.

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