So, when you apply for life insurance, what determines the premium rate? Your life insurance premium is determined by your mortality rate.
Essentially, it comes down to how much you have to pay for the product in order for the insurer to profit from selling it to you.
It may sound morbid, but actuaries do this, and insurance companies use mortality tables to determine how much you should pay for life insurance.
Risks affect your life and your insurance premium, regardless of your job, gender, or physical condition.
According to Edward E. Graves, author of “McGill’s Life Insurance,” before an insurance company can rate a policy, applicants must be classified correctly. Age, family history, residence, habits, and economic status all influence how much you pay for life insurance premiums—or whether you are issued a policy at all.
However, given the risks, it stands to reason that not everyone should be offered insurance on the same terms. Should nonsmokers and smokers, for example, have the same rates? Based on smoking-related mortality rates, insurance companies have, predictably, raised premiums for those who smoke.
As a result, in order to determine rates, insurance companies must establish a range of mortality expectations and risks.
To be successful, an insurance company must maintain a balance of risks and rate classifications on both ends of the spectrum. If the company’s risk underwriting is too conservative or liberal, it may lose business to competitors. On the New York Life website, you can learn more about underwriting policies.
Because everyone’s situation is different, there may be some unavoidable disparities in the risk classification system, and each classification must be broad enough to include a variety of risks. The challenge for insurance companies is to avoid creating extreme inequity among policyholders by using risk tables that are too narrow or stringent.