Policy factors affecting the cost of life insurance
The type of life insurance you choose
The question of the length and type of policy you choose are related, as the broad distinction in types of policy is between term insurance and whole of life insurance.
A term policy will insure you for a set period of time – for example, 20 years – while a whole of life policy will offer a guaranteed payout whenever you happen to die.
With term insurance, the longer you insure for, the greater the risk to the insurer that it will have to pay out, and the more you will have to pay in premiums.
Whole of life cover
With whole of life, the guaranteed payout means that premiums are far greater and, typically, the amount insured is much lower.
Within these broad categories there are further sub-divisions, though. For example, decreasing term insurance and family income benefit tend to be two of the more affordable choices as the level of cover drops over the term of the policy, perhaps in line with a repayment mortgage. With a level term insurance policy, the amount insured would remain the same over the entire length of the policy, increasing the risk to the insurer.
The level of cover
The amount insured is under your direct control, as you choose it at the start of the policy. The larger the sum insured, the higher the price.
Guaranteed and reviewable premiums
You can choose whether your premium payments are reviewable or guaranteed. Reviewable premiums may be cheaper at the outset, but they can be raised in the course of the policy if, for example, the provider experiences higher claim levels than it had anticipated, or if a major change in interest rates increases its cost base.
It’s generally the case that guaranteed premiums will work out cheaper over the full policy term, and this option also offers peace of mind regarding the long-term affordability of the policy.
Personal factors affecting the cost of life insurance
Your Current Age
It’s a sad fact of life that as you get older you get closer to the grave, so age is an obvious extra risk to providers offering term insurance.
While whole of life insurance is guaranteed to pay out whenever you die, providers will offer cheaper premiums to younger people because they will calculate that the premiums will be paid for a longer period of time.
Gender used to be a factor in pricing life insurance, with women enjoying lower premiums based on the statistical fact that they live longer.
In 2012, though, the European Court of Justice gender directive made it illegal to use your sex to determine insurance price.
Your Current State of Health
Your overall state of health, your height and weight will all be considered when working out the premium. When gaining quotes online, it is important to note that an assumption is made that you are in good health.
Your Medical History
As well as your current state of health, an insurer will want to know the medical history of you and your family. Based on your medical history, the insurer may do one of three things:
- Offer the policy on its standard terms
- Place an exclusion on the policy relating to a pre-existing condition you may have
- Cover any pre-existing conditions but charge a higher premium to reflect the increased risk
Smoking & Other Lifestyle Choices
Are you a Smoker?
Smoking will be judged as a serious health risk by life insurers and, although they’ll be able to arrange cover, premiums will typically be much higher than for non-smokers.
Insurers may not differentiate between cigarettes and e-cigarettes or vaping, but some ask whether you’re a light or heavy smoker; and for a very heavy smoker the insurer may require additional medical information.
Giving up smoking can lead to a cut in premiums and you’re considered a non-smoker if you’ve quit for 12 months or more. You can then tell your insurer that you’re a non-smoker and – if you pass a cotinine test for nicotine – your premiums will be adjusted accordingly.
Other lifestyle choices including hazardous activities
You’ll be asked certain questions about your lifestyle when applying for a policy and, again, the greater the risk you’re deemed to be at, the higher the price of your premiums will be. For example, your level of alcohol consumption is something that will be considered.
While you’ll also be asked about dangerous hobbies and pastimes, it is usually the case that if you practise a dangerous hobby, such as gliding, the insurer could either place an exclusion on the policy or increase the amount you have to pay, although this will depend on the hobby and insurer.
Optional extras on your policy
Life insurance policies can come with a wide variety of additional cover benefits, things such as terminal illness cover (a very common feature), waiver of premium, bereavement counselling and/or health and wellbeing services.
Such things may be offered for an additional premium, or may be built into the standard price of the policy.
You may find options such as the ability to extend the length of a term policy at the end of the deal, or to convert it into a whole of life policy; you’re likely to pay more for such flexibility.
Joint life insurance – Including your spouse
Covering two individuals under a single policy is likely to be a little cheaper than taking out two separate policies, but it’s not always the right choice if there are children or other dependants to consider.
A joint policy will only pay out once, whereas policies taken out on two individuals could offer two separate payouts. If you’re in any doubt about the right choice for you, speak to an adviser.
Including critical illness cover
Critical illness cover does not come as standard on life insurance, but the two products are often bought together. This will be a cost-effective option if you want both types of cover, but note that adding critical illness insurance will significantly add to the cost of your life policy.
Examples of how much term life insurance may cost
As has been stressed, there can be no standard example of the cost of life insurance because individual clients and insurers all differ, but below are some test quotes for a 25-year-old person, a 40-year-old and a 55-year-old.
The quotes were retrieved from the Drewberry’s online comparison engine on 31 August, 2016 and all age group quotes were based on:
- No critical illness cover
- An office worker
- A non-smoker
- An assumption of good health
Decreasing term life insurance costs for a 25-year-old
Based on the above criteria a 25-year-old seeking £50,000 worth of decreasing term life insurance for a term of 25 years would pay between £4.33 and £8.01 a month in premiums. (Note that adding on critical illness cover would raise premiums to between £7.70 and £9.76 per month.
Level term life insurance costs for a 25-year-old
Based on the above criteria a 25-year-old seeking £50,000 worth of level term life insurance for a term of 25 years would pay between £4.59 and £7.30 a month in premiums. (Note that adding on critical illness cover would raise premiums to between £9.65 and £12.53 per month).
In this example there isn’t much difference between the cost of decreasing term and level term cover because many insurers have a minimum monthly premium and at younger ages and smaller levels of cover the premium can be below this level so the insurer rounds it up to their minimum.
At these low levels of premiums (typically below £10 per month) it’s often worth increasing the level of cover in your quote to see if it makes any difference to the premium at all. For larger levels of cover you’d see a far more pronounced difference in cost.
Decreasing term life insurance costs for a 40-year-old
Based on the above criteria a 40-year-old seeking £50,000 worth of decreasing term life insurance for a term of 25 years would pay between £5.06 and £5.90 a month in premiums. (Note that adding on critical illness cover would raise premiums to between £17.27 and £19.72 per month).
If the policy term was increased to 35 years then the premium quotes were between £6.22 and £8.07.
When the cover levels were raise to £100,000 over 25 years, the monthly premiums ranged between £7.32 and £9.48 a month.
Level term life insurance costs for a 40-year-old
Based on the above criteria a 40-year-old seeking £50,000 worth of level term life insurance for a term of 25 years would pay between £6.22 and £10.10 a month in premiums. (Note that adding on critical illness cover would raise premiums to between £22.21 and £31.15 a month).
If the policy term was increased to 35 years then the premium quotes were between £7.91 and £11.09.
When the cover levels were raise to £100,000 over 25 years, the monthly premiums ranged between £9.74 and £12.84 a month.
Decreasing term life insurance costs for a 55-year-old
Based on the above criteria a 55-year-old seeking £50,000 worth of decreasing term life insurance for a term of 25 years would pay between £14.10 and £20.73 a month in premiums. (Note that adding on critical illness cover would raise premiums to around £65-70 a month).
When the cover levels were raise to £100,000, the monthly premiums ranged between £25.13 and £35.82 a month.
It was not possible to complete an online quote for a 55-year-old over a 35-year term due limits on how long the policy can run with term insurance. If someone wanted the policy to run longer they could consider whole of life insurance.
Level term life insurance costs for a 55-year-old
Based on the above criteria a 55-year-old seeking £50,000 worth of level term life insurance for a term of 25 years would pay between £20.01 and £26.88 a month in premiums. (Note that adding on critical illness cover would raise premiums to between £94.57 and £123.14 a month).
When the cover levels were raise to £100,000, the monthly premiums ranged between £28.96 and £50.00 a month.
Finding out how much life insurance will cost you
To get a better idea of policy prices and cover levels for your particular situation, try our quick and easy online life insurance comparison quote service.
You’ll be asked if you want decreasing or level term cover, to choose the sum insured and the policy term, your occupation and whether you’re a smoker.
The results table will then show the name of the insurer, cover levels, the length of cover, whether premiums are guaranteed or reviewable and the monthly cost.
You can call us on 02084327333, or – to save your phone bill – use our website form to ask for a financial adviser to call you back.
To get a much better idea of the right policy for your needs and the cost, it is a good idea to to speak to an expert adviser.
Our advisers are be able to factor in any medical conditions you may have suffered to give you a more accurate indication of how much you would need to pay for life insurance.
Director at Drewberry Insurance