By Chantal Marr, LSM Insurance
Special to the Financial Independence Hub
Life insurance protects your family financially, but it can also be huge strain on your budget. Over the years, even a small savings in your premium can really add up. The following factors are used to determine the rate you will pay. Not all of these factors are controllable; however, there are some lifestyle changes you can make to lower your premium.
1. Age at Time of Purchase
The younger you are at the time of purchase, the lower your rate will be. Insurance experts say the sooner you buy a policy, the better. Chris Huntley, life insurance agent at Huntley Wealth and Insurance explains, “Age is the most important contributor to both term and whole life insurance rates. If the insured outlives the initial term, the insurance carrier must adjust the premium to reflect their new age.”
2. Your Health History
Insurance providers need to know of any health problems you may have had in the past to determine your risk factor. Chronic illnesses could result in higher premiums. According to Canada Protection Plan, “Generally, insurance underwriters review an applicant’s medical history, and assign a rating based on the presence (or lack there of) of common medical conditions.”
3. Current Health
Most insurance providers require a medical exam to determine how healthy you are. The doctor will look for signs of high blood pressure and other conditions that may lead to future problems. If you are in good health, you will typically qualify for lower rates. “Your health is a key indicator of the risk you pose to an insurer and will directly impact not only your ability to get a policy but how much you’ll pay for the policy.” Richard Laycock, senior insurance writer.
4. Your Weight
Obesity can lead to all types of health problems. Being overweight or obese can put you in a higher risk category for insurance purposes. “Life insurance premiums are also based on your weight, or at least the proportion of your weight to your height. There are ranges and a theoretical norm at the center, that indicate a “normal” proportion. To the degree your own height-to-weight ratio varies from the ideal range, you will pay more in premiums,” says Neal Frankle, CFP.
5. Hazardous Occupations
Some jobs are more dangerous than others. Fishermen, riggers and firemen have a much greater chance of getting hurt or killed on the job than an accountant. If your job is considered a bit risky, you could pay higher premiums or even be denied coverage. “Obviously you cannot lie about what you do for a living, but the trap some people fall into is overplaying their job title,” says Damien Fahy, founder of MoneytotheMasses.com.
6. Tobacco Use
Smoking is associated with many health risks, thereby putting you in higher rate category. If you quit smoking, you may qualify for lower rates after being smoke-free for at least one year. “Smokers are more likely to have ongoing health problems and have a shorter lifespan than non-smokers, making them more of an insurance risk for any insurance company,” says Adam Ludolph, financial advisor.
7. Alcohol Consumption
Alcohol consumption can have serious effects on your health. That is why heavy drinkers are likely to pay more higher insurance rates. That said, there may still be options depending on the exact details surrounding a proposed insured’s prior drinking habits. “Anything more than social drinking will affect your life insurance rate. Drinking more than two drinks a day will generally knock you out of “preferred” rates and drinking more than three or four drinks will knock you out of “standard” life insurance rates,” according to Ed Hinerman, owner of Hinerman Group.
Depression or a history of mental illness can double your life insurance premiums because you are considered a higher risk. According to Certified Financial Planner, Jeff Rose, “It has been shown that people with depression have a higher rate of mortality than people who aren’t depressed.”
9. Family Health History
If members of your family have a history of serious illnesses such as cancer or heart disease, you have a greater chance of developing the disease as well. This makes you a risk and could mean paying more for life insurance. “As far as family history is concerned, your insurer’s attitude will depend on the condition, how many family members were affected, and how old they were at the time.” Jeff Rose, CFP.
10. Your Gender
On average, women have a longer life expectancy than men, which means they generally pay lower rates. According to the Financial Services Commission of Ontario (FSCO), “Female policyholders pay on average 25% less than male policyholders. Changing your gender will not really help: insurers consider the gender you were born with.”
What you do in your spare time can greatly affect how much you pay for life insurance. Hobbies like mountain climbing and skydiving put your life at risk, which is a huge concern for insurance companies. “There are dozens of dangerous hobbies and lifestyle activities that can increase insurance rates,” says Joel Winston, a New York-based attorney.
12. Driving Record
Many life insurance providers will look at your driving record to determine your risk factor. They don’t even have to ask about violations: your record can easily be accessed through the Department of Motor Vehicles. Keep in mind that the previous 3 to 5 years are the most crucial, so if you have been incident-free for at least 3 years, you may qualify for more favourable rates. “A bad driving record could be enough to bump you from a preferred rating class to a less ideal one. Life insurance companies rate you according to a number of different health and lifestyle factors. If you’ve been a bad driver, they’ll consider you a higher risk,” says Dawn Mentzer of QuickQuote.
13. Foreign Travel
The destination, duration and frequency of your travels can have an impact on your life insurance premium. Certain countries are considered quite dangerous and if you spend a considerable amount of time in these places, you are putting your life at risk. Travelling on a regular basis can also put you at a higher risk of death, which means higher insurance rates. “Underwriting decisions can range from preferred or standard rates, to a rated policy. Some insurance companies will put an exclusion if the death occurs within a specific country. This will be made known to the insured at the time the policy is issued, according to the Independent Financial Brokers of Canada.
14. Credit History
Insurance companies may include your credit score when calculating your risk. A high credit rating could mean lower premiums than someone with a low credit rating. According to the Cooperators, “An individual’s credit score is simply a reflection of a person’s level of responsibility and behaviour when it comes to managing their financial obligations.”
15. Criminal History
A background check is generally standard procedure when evaluating a life insurance application, so don’t try to hide a criminal history. The severity of the crime and the length of time you have been crime-free will affect how you are underwritten. However, if you are in prison, you will likely be denied coverage. Janet Gillespie, a spokeswoman for Prudential states, “The risk of insuring someone in prison is much too high. We do not offer life insurance coverage to any incarcerated individual … our underwriter feels this is industry wide.”
16. Size of Death Benefit
Not surprisingly, the larger the death benefit, the higher the premium. Bob Barney, president of Compulife Software says, “Most companies will let policyholders scale back the level of coverage and pay lower premiums.”
17. Length of Term
A large portion of the cost of specific term life insurance depends on the length of the term. The longer the term, the higher the premium. “The longer a term life insurance is, the greater the annual premiums,” says Monique Burkes, business analyst and insurance agent.
18. Type of Life Insurance
Life insurance policies are available in three main types:
- Term Life Insurance – provides a death benefit and costs the least
- Whole Life Insurance – provides a death benefit plus an investment component
- Variable & Universal Life Insurance – similar to whole life but with more flexibility
“A higher rate of return on cash value can go a long way toward keeping policy premiums to a minimum,” says Reno Frazzitta, an investment advisor, certified retirement counselor, and founder of Smart Money Financial Advisors. “A lower-than-expected return on cash value will require a higher funding amount to keep the policy in force longer.”
19. Where You Buy Life Insurance
An experienced insurance agent or broker will be able to get you a much better deal. They have access to many insurance companies and can find the best policy at the best price for your needs. “It’s important to find a broker you’re comfortable with,” said Jennifer Fitzgerald of PolicyGenius. “They need to go to bat for you to obtain the best rates from insurers and have your best interests at heart.”
20. Rounding Your Age
When you buy a life insurance policy, make sure to buy when you can round your age down and not up. For example, if you will be turning 30 on December 31, get your policy during the first six months of the year so that you can round down to 29. “Most life insurance companies use your attained age (the age you will be on your next birthday) for calculating your insurance age,” says Eric Van Haaften, president of Affordable Life.
21. Don’t Buy Unnecessary Riders
Insurance agents may offer you all types of additional riders such as the accident death benefit or term conversion rider. You may need these riders, but if you don’t, then just say no. Only buy what you really need.
“The extra bells and whistles your insurance agent offers you when you purchase your life insurance coverage should generally be avoided,” says Randy McClintick.
22. Make Annual Payments
One annual payment saves the insurance company money on administrative costs. They may pass these savings on to you in the form of lower premiums. “Paying annually saves you money. You’ll pay 8% more just for the convenience of making monthly payments.” says Kerri-Lynn McAllister of RateHub.ca.
23. Marital Status
Being married might not have a direct impact on how much you pay for life insurance; however, you may be able to save money by purchasing a joint policy. According to Angie Mohr, a Chartered Accountant and Certified Management Accountant, “Life insurance premiums are also based in part on marital status so renewals may be less expensive after marriage. Your combined income replacement needs may also change.”
24. Purpose of Insurance
The reason you need life insurance can play a role in determining your rate. Whether the policy is part of your estate plan or for the protection of your family or business, the premium will be assessed accordingly. “Term insurance is pure protection, like fire insurance or auto insurance. Its sole function is to support your family if you die. You can buy large amounts of coverage for modest amounts of money – and big policies are what your spouse and children need.,” says personal finance expert Jane Bryant Quinn.
25. Healthy Living
Insurers may ask for a medical exam to assess your health risk before underwriting your policy. Passing the test is only the first step. By keeping yourself healthy with a proper diet, exercise and regular doctor visits, you can stay healthy and keep your premiums low. Certified Life Insurance agent, Zael Miransky, from Miransky Wealth Management (Toronto, Ontario) says, “Many insurance customers pay 25% more for their Life Insurance Policy because they are overweight. Staying in shape and maintaining a healthy lifestyle will not only eliminate this extra portion of the costs, but in addition can also result in a discount of up to 25%.”
How much each of these factors impact your life insurance rates depends on how much weight the insurance company puts on each and on the combined effects. Each policy is rated on a case-by-case basis and no two companies are the same. That’s why it’s important to compare life insurance quotes and shop around.