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Do consumers know what impacts life insurance rates?

Life Insurance and Annuities
by Jeff Lee
Liquidity in life insurance is useful in some situations.
Liquidity in life insurance is useful in some situations.

One salient truth about the life insurance sector often proven both anecdotally and through actual surveys is consumers don't often understand the ins and outs of coverage. The industry pours significant efforts into better educating consumers and improving outreach, and that has been especially true for the last decade or so. However, it's not always easy to tell if insurers, brokers and agents are gaining any ground in this regard.

An area in which more of these efforts should, perhaps, be focused is in the factors that impact the cost of life insurance. After all, polls generally show consumers see the value in coverage and may even have some of it, but those who don't typically fall behind because they overestimate the cost of such a policy - often dramatically. A recent industry poll found that, as with many other things related to life insurance, people seem to have a grasp on the basics of what affects their premiums, according to Value Penguin. For instance, things like a buyer's age, general health and whether they use tobacco products are all broadly understood factors.

Consumers may need more information to fully understand their life insurance options.Consumers may need more information to fully understand their life insurance options.

Starting with the basics
The average monthly life insurance cost for a non-smoker who's around 25 years old is less than $26, or slightly more than $308 for a year, according to Value Penguin data. For someone in the same age group who does smoke, the number surges to almost $1,035 per year. Similar growth is seen for 30- and 35-year-old applicants, and prices don't start going up more sharply until those people reach their 40s and 50s. For instance, the jump for insuring a 45-year-old non-smoker to the same person at age 50 is almost $32 per month - an increase of more than 50%.

Across all groups, tobacco use plays a huge role in determining life insurance premiums - it increases costs an average of 306% regardless of age.

Where they fall short
Meanwhile, men will typically pay about 24% more for term life insurance than women, irrespective of the value of those policies or the age applicants are when they get them. And of course, the longer the terms on those policies, the more people can expect to pay for them per month, though in many cases, the difference between a 10- and 20-year term may be smaller than one might think, as little as $3 per month depending upon other factors.

However, fewer than 2 in 3 respondents in the above-mentioned poll knew their family members' health history plays a role as well, and that can be a major factor. For instance, on term life insurance, people who have had a parent die from potentially hereditary health problems before they turned 50 typically saw premiums 41% higher than those whose families had no concerning medical histories. On average, that raised the buyer's annual premiums from roughly $525 to more than $700. Nearly 90% of insurers would charge higher rates for applicants in these cases, compared to only about 1 in 7 who would do so for parents dying before age 60.

In addition, the type of condition that resulted in the parent's death seems to play a role: Heart attacks led to the highest premium hikes by far (more than $211 per year), followed by prostate cancer (almost $162) and stroke (nearly $161).

Meanwhile, Investopedia notes that even more factors are starting to come into play for insurers, which consumers may not know about. Things like social media use that shows off a dangerous lifestyle - such as people who are avid mountain climbers - or a person's driving record could end up having an impact on their coverage costs, or in some cases lead to insurers denying coverage outright, depending upon what kind of data they use.

What's the issue?
With all of the above in mind, it's worth noting that about 3 in every 5 people who buy life insurance wait until after their 45th birthday to do so, according to No Exam. A typical man with a "preferred plus" rating (that is, those considered to carry the least risk for insurers) seeking a 20-year term life insurance policy at age 46 can expect to pay about $19 per month for coverage. If they'd purchased the same insurance at age 36, it would have only cost them a little more than $11 per month.

On average, the cost of life insurance increases 65% from age 30 to 40, and 96% from 40 to 50. In a survey of people already interested in life insurance, only 6% correctly estimated their approximate premiums.

As a result of these issues, it may not be sufficient for insurers, brokers and agents to talk to consumers only about the cost of life insurance but also why it costs what it does. That extra outreach effort could help people make better informed decisions about their coverage overall.



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