31 May 2023

How are life insurance premiums calculated?

Before you take out life insurance, you may hear the word ‘premiums’ and wonder what this means. So, what is a life insurance premium and how are life insurance costs calculated? To help you get the protection you need, let’s take a look at some of the factors that affect life insurance premiums.

How are life insurance premiums calculated?

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A life insurance ‘premium’ is the amount of money you pay for being covered by a life insurance policy. With Legal & General you would pay your premiums monthly.

With a term life insurance policy you choose how long you want your cover to last –  so you may choose to cover the length of your mortgage or until your children reach a certain age. You will pay your premiums every month for the duration of the policy.

To make a successful claim on a life insurance policy, it’s important to remember that your life cover will only remain valid if your premiums are up to date.

The more likely you are to make a life insurance claim, the more likely it is that an insurer will have to pay out, so you will pay more for your policy than someone less likely to make a claim.

Below, we summarise ten personal factors that determine how life insurance costs are calculated, followed by five factors that are linked to specific policy details.

1. Age

Depending on your general health, the later you take out life insurance, the more likely it is that a claim will be made. This means your premiums will cost you more. And so on the other hand, provided you’re in good health, life insurance premiums will normally be cheaper when you are younger. 

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2. Health status

Your life insurance premiums will be calculated based on the medical information you provide when you apply. Any health condition that may make it more likely that the insurer will have to pay out during the policy will ultimately increase your premiums.

In order to assess the risk of a payout, your insurer may request to access your medical records before they decide whether to offer you life insurance. Note – they will need your permission before contacting your GP.

3. Family medical history

Your family medical history can also affect how your life insurance premiums are calculated by your insurer. This is because you could be more likely to develop a serious medical condition that has affected close relatives – see the examples below:

Note that your insurer may not cover you if you currently experience any of the above conditions, and depending on the severity of any symptoms, your premiums may be higher.

4. Weight

Insurers such as Legal & General will take your body mass index (BMI) into account when determining how your life insurance costs are calculated. A BMI of between 18.5 and 24.9 is considered to be healthy, according to the NHS. The higher your BMI, the greater the risk that you will experience health problems like diabetes, heart disease and high blood pressure so your premiums would be higher if you’re above the normal range.

5. Smoker status

Smokers are statistically more likely to experience ill health, such as stroke, cancers and heart disease, which can increase the chances of an early death. So while you can still get life insurance as a smoker, you may pay higher premiums. And in case you’re wondering, vaping is treated the same as other types of smoking for insurance purposes.

6. Alcohol consumption

Alcohol consumption is also linked to how your life insurance premiums are calculated. The health risks from excessive alcohol include serious diseases like certain cancers and liver disease, as well as a greater risk of harm from accidents, injuries and violent incidents, according to the NHS. In England, among people aged 15 to 49 years, alcohol is the leading cause of ill-health, disability, and death.

7. Occupation

Some jobs carry a greater risk to your life than others, such as working in the police or armed forces, or working at heights. If an insurer deems your occupation to be ‘high risk’, you may be charged higher premiums for your life insurance.

8. Hobbies

If you have certain hobbies that are deemed hazardous, such as extreme sports, then your insurer may take this into account when calculating your life insurance premiums.

Here are some examples of sports, hobbies and activities that an insurer might view as a life insurance risk:

  • Paragliding
  • Climbing
  • Skydiving
  • Mountaineering
  • Trekking
  • Caving and potholing
  • Canyoning
  • White water rafting
  • Motor car sports
  • Private or club flying.

However, your participation in these activities would not automatically prevent you from getting life insurance. The exact cost of your life insurance premiums would be calculated based on factors like the frequency that you take part; your age and experience level; where the activity takes place; and whether you’re a member of a professional body that oversees aspects of the activity.

9. Mental health

If you have a history of mental illness or experience conditions like depression or anxiety, this may affect the calculations of your life insurance premiums. You can still get cover, but the decision will be made on the basis of your recent medical history and the nature of your condition. Read more in our guide to life insurance and mental health.

10. Where you live

If you intend to live overseas for a period of time, the cost of your life insurance premiums may be affected by factors like the accessibility of healthcare, armed conflict in the region, or the prevalence of certain diseases or infections. You will need to be a UK resident in order to qualify for Legal & General life insurance, and we class that as someone who lives in the UK and has spent at least 183 days in the country over the last tax year.

Policy factors that affect your premiums

1. Size of payout

A general rule is that the higher your life insurance payout, the higher your life insurance premiums will be. Try our life insurance calculator to work out how much life insurance you might need.

2. Length of cover

Your policy length is another factor that can affect how your life insurance costs are calculated. The longer you’re covered by a life insurance policy, the more likely it is that a claim will be made on the policy at some stage, which means your premiums are likely to be higher.

3. Type of life cover

There is more than one type of life insurance, and the type you choose will make a difference to how your life insurance premiums are calculated and the level of protection you receive.

  • Level term life insurance premiums are usually higher than a ‘decreasing life insurance’ policy, as the amount of cover stays the same during the length of the policy.
  • Decreasing life insurance is used to protect a repayment mortgage, and therefore the premiums are likely to be lower than term life insurance as the cover reduces inline with how a repayment mortgage reduces.
  • Legal & General Critical Illness Cover can be added to a Life Insurance or Decreasing Life Insurance policy at an additional cost when taking out cover. By adding Critical Illness Cover, you can get some financial protection for a defined list of critical illnesses.
  • Legal & General Over 50s Life Insurance could be an affordable way for you to leave some money for your loved ones after you die. It could be used to help settle unpaid bills, as a gift or to help towards the cost of a funeral.

4. Type of premiums

Some life insurance providers such as Legal & General offer fixed premiums, which means your premiums are guaranteed to remain fixed for the duration of the policy unless you make any changes to it. Other insurers may offer ‘reviewable’ premiums, where the cost can increase at a later date.

You could also look into ‘increasing term life insurance’, which we cover in our guide to different types of life insurance. This is where the amount of cover is reviewed against measures of inflation, or a fixed rate, so it rises over time. Premiums are normally reviewed annually or at set yearly intervals, meaning your premiums increase over the length of the policy. This type of policy is sold via our team of financial advisers.

5. Your choice of insurer

The cost of your life insurance premiums may differ according to which insurer you choose, as each provider may calculate costs differently

If you’re looking to protect your loved ones, it may be tempting to look for the cheapest life insurance, but there are factors to consider aside from the cost. For example, it’s worth looking into whether an insurer exempts certain illnesses or health conditions, or any additional benefits they may offer, like Terminal Illness Cover.

And when you choose an insurer, it’s always a good idea to select a brand you trust. For instance, Legal & General is an award-winning life insurance provider, and our life insurance has been rated 5-star by Defaqto, which is the highest rating available. Find out more about our life insurance and critical illness cover.

Why does a life insurance ‘extension’ cost more?

If you wish to renew your life insurance when your policy expires, you will need to take out a new policy from scratch. The terms of that policy would be offered on the basis of your health status at the time, and since you would be older than when you first took out life insurance, your premiums would likely be more expensive.

However, You can request to make changes to your policy or you may be able to increase your cover without answering further medical questions following certain life events, such as birth of a child or getting married or entering into a civil partnership. Any changes you make will affect the premiums that you pay. Eligibilty criteria applies.

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