Whether the policy you’re considering is term (a policy for a set amount of time), whole (a policy that accumulates a cash value) or universal (a flexible policy that also builds cash value, but lets you shift between the policy's insurance and savings components), the annual premiums are influenced by a number of factors about your life. Among them are gender, the quality of your health and if you are, or ever were, a smoker. Family health history (did a parent have cancer or heart disease?), hazardous hobbies/activities such as hang gliding or scuba diving, international travel, your height and weight, and occupation (if you have a dangerous job or one with a higher-than-average mortality rate) can also affect the amount you’ll pay.
If you’re considering a whole life or universal policy, the rate of return on the cash value will also drive the premium up or down. “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 in Sterling Heights, Mich. “A lower-than-expected return on cash value will require a higher funding amount to keep the policy in force longer.”
But as Chris Huntley, life insurance agent at Huntley Wealth and Insurance, in San Diego, Calif., explains, "Age is the most important contributor to both term and whole life insurance rates." How old you are plays the biggest role in how much you'll pay to purchase a new life insurance policy.
The Age Factor
The annual premium, or “rate,” for a term life insurance policy is determined at the time of purchase and set for the duration of the policy. “The rate is for the duration of the term,” says Frazzitta.
Typically, the premium amount increases about 8% to 10% for every year of age, according to Ted Bernstein, CEO, Life Insurance Concepts, Inc. “A 45-year-old male will pay on average $1,125 for a new, 20-year term policy with $1,000,000 of coverage,” he says. “The same policy purchased at age 46, will cost $1,225 – and $1,345 a year if purchased at age 47.”
The reason every year inches up the cost of term life insurance is simple math. “Every birthday puts you one year closer to your life expectancy and thus, you’re are more expensive to insure,” says Huntley, who reports that rates increase every year by 5% to 8% in your 40s, and by 9% to 12% each year if you’re over age 50.
To be able to hold term life insurance prices steady – rather than raising premiums every birthday – insurers spread the premiums you would pay over 10, 20 or 30 years and average them into one payment, Huntley explains. Instead of paying low premiums when you’re young and very high premiums when you’re older, you pay the same amount every year.
Once the term of your current term policy expires, you could face very steep rates based on your age.
“If the insured outlives the initial term, the insurance carrier must adjust the premium to reflect their new age,” says Huntley.
Whole life policy rates do rise with age, however. “The premiums are determined by the insurance carrier each year based on actuarial tables. And they increase at each successive age because each year there is a bigger drain on the cash value due to the rising mortality charges,” says Frazzitta.
Qualifying for Coverage
Huntley says age also affects whether a person will qualify for life insurance coverage at all. “Older ages can certainly limit the applicant’s options.” For example, most carriers only offer 20-year term policies to those ages 18 to 70, he says. After that you can't get a term that long.
Other requirements also increase as you age. “Every carrier has underwriting requirements that typically involve certain health-related testing,” says Huntley. “The older you are, the more testing a carrier will require.” For instance, a 44-year-old applying for $500,000 of coverage with American General Life Insurance Company will likely be required to have a medical exam including blood and urine testing. At 45, however, Huntley says the same person looking to purchase the same coverage will needs to have a resting EKG along with the medical exam, and blood and urine tests.
“Additional testing requirements certainly can have an effect on rates because they can catch more health issues,” he says. Life insurance carriers have also begun cognitive testing for senior applicants. “I recently had policies declined because an examiner went to my 75-year-old applicant’s home and listed 10 items in the room. My client could only remember three of the 10 items and was declined for coverage due to what was thought to be a cognitive impairment.”
The Bottom Line
Because every year can tack dollars on your life insurance premium, try to get any new life insurance policy you’re considering before your next birthday. To ensure you receive the best rates for the coverage you’re seeking, obtain quotes from two or three life insurance companies.
Consider talking to an independent agent, who works with more than one insurance company. Be careful to buy no more insurance than you need (see What Your For Life Insurance Agent Makes – On You. For more information on buying insurance, see Top 10 Life Insurance Myths.