When it comes to determining the premium rates associated with different types of life insurance policies, there are a few factors that are usually considered by the companies.
Two of the most important ones are interest and mortality. In addition to these, expense is another deciding factor that has a lot to do with the premium rates of insurance policies, especially in case of a life insurance. It may be referred to as the sum of money that the insurance provider is supposed to add up to their costs in order to cover different types of overheads such as operational costs of the company, investments on account of premiums and for paying the massive sums of money for claims filed by different clients. A few details on these factors are discussed in the paragraphs below.
Mortality
The essence of a life insurance policy may be contingent upon a big group of individuals who co-share the death risk of the insured person. In order to make a predicted calculation of the cost every member of the group should be responsible for, the insurance companies normally try to calculate the risks of the insured person dying in the upcoming years. Mortality tables come in very handy in this regard since they provide the insurance providers with a basic estimation on the amount of money that they would have to pay annually on account of death claims. By making use of mortality tables, life insurance providers usually figure out the median life expectancies for different age groups.
Interest
Interest is the second most important factor involved in the process of computing premium rates in interest profits. The amount of money paid by the clients are usually invested by the insurance providers in different types of opportunities like real estate, mortgages, stocks, bonds, etc. The idea behind these investments is to earn a handsome amount of money that might be adjusted on account of interest for the invested funds.
Expense
Expense is the third most important consideration when it comes to determining premium rates of a life insurance policy. Expenses involve the operational costs of the company to keep it running optimally. These expenses are usually estimated by the insurance providing company on the basis of different costs like salaries, postage, legal fees, rent, compensation for agents, etc. The total amount of money charged to an insurance policy holder on account of operational expenses is normally referred to as expense loading. It may be thought of as a variable cost area that may differ for different insurance providing companies on the basis of their efficiency and expenses.
In addition to the above mentioned factors, there are a few others that cause a minor effect on the cost of premium rates associated with life insurance policies. For instance, the time of the year when you buy an insurance policy also causes an effect on the overall price. According to a general trend, life insurance policies may be bought at a comparatively cheaper price if you sign up for it in the first quarter of the year. This is due to the fact that majority of the insurance providing companies make use of mortality charts and age charts in order to determine the rates of different policies. Consider the below mentioned example to develop a better understanding in this regard.
If the insurance premium for a 60 years old person is $70.00 per month, it may be $75.00 for a person aged 60 and a half years while the premium rate may go as high as up to $80.00 for a 61 years old person. In simpler words, it is strongly recommended to buy the life insurance policy earlier in a year since according to the age charts, you might fall in an age group with older people if you wait for only a few months and your premium rates might eventually increase as well.
