How life insurance premiums are calculated
The cost of life insurance is influenced by several factors such as your age, health and the length of cover you need. If you understand which areas have an impact on your premium, you may be able to cut costs a bit.
Some of the biggest factors to consider include:
How much cover you need
How much cover do you need to adequately provide for your family in the event of your death? You need to take out the necessary level of cover to match this, looking at factors such as your mortgage and how many years are remaining on it, and how long your children are likely to continue living at home before becoming financially independent. You may want to take into account your current income, and any existing debts. Obviously, the higher the level of cover, the more expensive premiums will be.
Whether you opt for decreasing payouts
You can choose either a fixed level of cover for the duration of your policy, which pays out the same throughout the term, or a sum that decreases year after year.
A decreasing payout is generally cheaper, and may be suitable if you expect your dependants' financial demands to be smaller in the future – for example when your mortgage is smaller or paid off, or your children have flown the nest.
The length of cover
If you opt to take out a whole-of-life insurance policy that covers you until you die, your premiums will usually be higher than if you choose term insurance – that is, a policy covering you only for a fixed period, say 25 years.
Premiums on whole-of-life policies are usually fixed for a certain amount of time, say ten years, but after this they may rise – and could be based on any health problems you've developed, making it much more expensive. Term insurance, on the other hand, is usually less expensive yet you can set it to match the appropriate period, such as the term of your mortgage.
If you have existing health problems when you apply this is likely to increase the cost of cover, but it's vital that you declare any conditions otherwise claims could be invalidated if the insurer discovers relevant facts at a later date. You'll also be quizzed about your lifestyle – whether you smoke, are overweight, or work in a high-risk occupation – and this influences your premiums.
If you sign up for life insurance at a younger age, you'll generally enjoy cheaper premiums, simply because older people are considered a higher risk because they are closer to the end of their lives.
Whether you choose joint cover
Couples can take out a joint life policy that pays out when the first partner dies, although obviously this is usually more expensive than individual cover for one person because there's a greater likelihood of a claim being made on the policy.
Whether you include Critical Illness Insurance
If you decide to add on critical illness insurance as well, offering financial protection if you're diagnosed with a serious illness, your premiums will be higher. It is even more expensive if you apply later in life and have pre-existing medical conditions. The cover could be crucial, however, if you have to give up work because of poor health.