How are premiums calculated?

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Insurance – How are Insurance Premiums Calculated?

Life and health insurance is essentially a gamble. Neither you nor your insurance provider wants you to die or suffer a trauma or long term illness while you’re covered, but your premiums are priced to reflect the risk of this happening. Of course, if you outlive your life/health insurance policy without claiming, it brings you nothing but ‘peace of mind’.

The cost of life/health based insurances is primarily based on:

  • How much cover you want?
    Its obvious, but the higher the sum insured, the higher the cost of cover.
  • How old you are?
    The older you are in taking out an insurance policy, the higher the chance that you’ll claim and as a result the premiums are higher.
  • Your sex?
    Women live longer than men, and as a result, life insurance premiums are lower for women than they are for men. By contrast, trauma and income protection premiums are higher for women than men, reflecting higher claim rates among female policy holders.
  • How healthy are you?
    An insurance provider’s premium rates are calculated assuming applicants are healthy, increasing claims would lead to increased premiums costing both the clients of the insurance provider and their policyholders. To protect healthier applicants from this additional cost, life/health providers ‘rate’ non-standard applications to offset the effect of impaired health. In some cases the risk may be so high, a provider may even refuse your application altogether.

    However, it is important to note that once your policy is in place, your premiums will continue to be based on your health when you took the policy out and can be a good reason to set up your policy earlier in life.

  • Whether you smoke?
    Smoking is really an extension of health risk. Smokers are more likely to suffer health related illnesses and have a lower life expectancy than non-smokers. Quitting smoking is one of the easiest ways to reduce your premiums with many providers typically offering non-smoker rates after a year of not smoking.

Insurance Medicals

In most instances an insurance company is able to offer terms without the need for applicants to undergo a medical. However, some applicants may be asked to undergo a medical due to high levels of sums assured or because of something disclosed on an application or by your doctor when they were asked about your past health. This is to ensure that the level of premiums paid matches the insurance risk, after all, a provider doesn’t want to insure you to find out at point of claim you haven’t disclosed all the facts. Their refusal to pay out in this case is bad press. It’s also worth noting that just because an insurance provider requests a medical does not always mean they will charge you higher premiums. This is just their way of quantifying the risk they’re taking on.

Where can you buy Life Insurance?

Use a non affiliated broker and shop around. Remember, if you buy insurance from your mortgage lender, bank or elsewhere on the high street, you’re likely to pay over the odds, these providers are costed on the basis that your are less likely to look elsewhere. You may feel it easier to keep your insurance, home loan and investments all under one roof, but the reality is despite the bulk discount you may be offered, you may find you’re still paying way over the odds. Let our affiliated brokers shop around to find you the best deal.