When it comes to determining the premium rates associated with different types of life insurance policies, there are a few factors that are generally considered by companies.
Two of the most important are interest and mortality. In addition to this, expense is another deciding factor that has a lot to do with premium rates for insurance policies, especially in the case of life insurance. This can be the amount of money the insurance provider is expected to add to its costs to cover different types of overhead costs such as business operational costs, premium investments and to pay massive sums of money for claims filed by various customers. Some details on these factors are discussed in the paragraphs below.
The essence of a life insurance policy may depend on a large group of individuals who co-share the risk of the insured person’s death. In order to make a forecast calculation of the cost that each member of the group should be responsible for, insurance companies normally try to calculate the risk of death of the insured person in the coming years. Mortality tables are very useful in this regard, as they provide insurers with a basic estimate of the amount of money they should pay each year in the event of death. Using mortality tables, life insurers typically determine median life expectancies for different age groups.
Interest is the second most important factor involved in the process of calculating premium rates in interest earnings. The amount of money paid by the customers is usually invested by the insurers in different types of opportunities like real estate, mortgages, stocks, bonds, etc. The idea behind these investments is to earn a nice sum of money which could be adjusted on interest account for the invested funds.
Expense is the third most important consideration when determining premium rates for a life insurance policy. Expenditure involves the operational costs of the business to ensure its optimal functioning. These expenses are usually estimated by the insurance company on the basis of different costs such as salaries, port charges, legal fees, rent, agent fees, etc. The total amount charged to an insurance policyholder for operational expenses is normally referred to as expense loading. It can be considered as a variable cost area which may differ for different insurance companies depending on their efficiency and expenses.
In addition to the factors mentioned above, there are a few others that have a minor effect on the cost of premium rates associated with life insurance policies. For example, the time of year you purchase an insurance policy also has an effect on the overall price. As a general trend, life insurance policies can be purchased relatively cheaper if you purchase them during the first quarter of the year. This is because the majority of insurance companies use mortality tables and age tables to determine rates for different policies. Consider the example mentioned below to develop a better understanding in this regard.
If the insurance premium for a 60 year old is $70.00 per month, it can be $75.00 for a 60.5 year old while the premium rate can go up to 80, $00 for a 61 year old. In simpler words, it is highly recommended to purchase the life insurance policy earlier in the year, because according to the age charts, you might fall into an age group with older people if you only wait a few months and your premium rates might eventually increase as well.