It’s important that you don’t confuse affordability with value. A cheap life insurance policy won’t necessarily offer you what you require regarding coverage and could end up costing you more when your claim payout is not sufficient.
1. Your level of cover A higher cover amount usually equals a more expensive premium. However, generally, if you purchase a significant amount of cover you’ll pay less per $1,000 of the total amount. It’s important to choose a level of cover that is appropriate to your circumstances and budget. You might want to first speak with your broker to help you determine the right amount of life insurance you need based on your current income, family structure, and other financial commitments How much life insurance do I need?
First, calculate your financial obligations: Multiply your annual salary by the number of years you want to replace your income for, taking into account your debts, mortgage balance, and potential future needs (children’s education).
Second, determine your liquid assets: Savings, plus financial investments, plus your existing life insurance.
After that, subtract your liquid assets from your financial obligations to get an estimate of the amount of life insurance you need.
2. Premium Type Your insurer will generally provide you with a choice between stepped, level, and hybrid premiums.
Stepped premiums: Your premiums start out more affordable, but will increase as you age. This premium style is cheaper in the short-term as you only pay for the level of risk associated with your current age. Keep in mind that your premiums will increase as you get older and could become unaffordable in the long-run.
Level premiums: Premiums start more expensive than stepped premiums but don’t increase annually with your age. Level premiums generally only increase due to the automatic Consumer Price Index (CPI) increases.
Hybrid premiums: Select insurers will offer you the premium option that gives you the best of both worlds. Your premiums start out slightly higher than stepped premiums and usually increase annually until your policy reaches a pre-agreed upon age. Your premiums then convert to level premiums and generally only incur CPI increases. Some insurers may convert your premiums back to stepped premiums and continue with annual increases when you reach the age of 65+ years old.
3. Your Age The younger you are, the cheaper your premiums will usually be because you’ll generally be healthier and more active and thus a lower risk of possibly claiming in future. That’s why you’re encouraged to take out cover as soon as possible and not leave it until you’re much older and incur higher premiums as a result.
If you’re young, single and without dependents, a good place to start might be in purchasing income protection and critical illness cover, so you can cover your day to day expenses should you become ill or injured for a specified period of time.
4. Overall health, including smoking status and BMI Your overall health indicates how big of a risk you are to insure and in turn influences your premium rate. Typically, an insurer will ask whether you are a smoker and your height and weight so they can calculate your Body Mass Index (BMI).
Smoking increases your risk of getting lung cancer, stroke, and heart disease, and as a smoker, your premium could double that of a non-smoker. Your BMI also increases your health risks, including high blood pressure, and coronary heart disease. Typically, a BMI of 25 to 29.9 means you are overweight, while a BMI of over 30 indicates obesity.
5. Family history Certain diseases are considered to have a hereditary component. For instance, if you have a history of breast cancer in your family, it will usually be taken into consideration when calculating your overall risk.
If you have such a family medical history, the insurer might add an exclusion or loading to your policy depending on the insurer and their underwriting guidelines. The insurer may also request that you go for a medical exam.
6. Lifestyle (high-risk activities) Individuals participating in high-risk activities, like rock climbing or skydiving, might be rated as a higher risk. Thus you could pay a higher premium or have an exclusion on your policy, depending on the insurer. The same applies to your occupation, all things being equal, a person working a desk job might not pay as much as a person working in a mine.
It’s important to check with your insurer and fully disclose your hobbies. What one insurer considers high risk, another may not.
7. Your location The state you live in may affect your life insurance premiums. If your area is statistically proven to be dangerous and reflects a higher mortality rate, then you are more likely to incur higher premiums.
8. Built-in benefits vs paid options Generally, a life insurance company which has included a variety of built-in benefits with their life cover might charge higher premiums because they are seen as offering more value. It might be more affordable to find a basic life insurance policy without all the bells and whistles and only pay for the additional features and benefits you want.