If you and your neighbor buy new cars and you get identical vehicles identically equipped, you know one of you got a better deal than the other.
The one who is better at bargaining got the better price. The other one got the shaft.
Is that the way it is with life insurance, too? Why is it that twins can go to the same insurance company, choose identical coverage, and one will pay more? Is it bargaining power?
With cars, yes. But not with life insurance.
Once you’ve settled on the type of life insurance policy and the features you want, typically what you pay is almost entirely determined by one four-letter word.
Risk is the overriding factor for virtually any kind of insurance. Insurance companies employ underwriters to assesses your risk to the company.
For example: You have a house you want to insure against loss. When it comes to fire insurance, if your house is made of brick and it’s on a tiny, barren island in the middle of a large lake, there’s less risk of fire than if your house is a log cabin nestled on a hillside in the middle of a forest. Your premium for the brick house will be lower. (Ever notice that when you apply for fire insurance for your home, the company wants to know the distance—in feet—to the nearest fire hydrant? Risk!)
On the other hand, your brick house on the island has a greater risk of flooding than the log cabin, and you’ll pay a higher premium for flood insurance. Your circumstances determine the risk.
Life Insurance Underwriting
It’s the same with life insurance. The insurance company wants to know with reasonable certainty how much risk they’ll be assuming when they issue a life insurance policy, so they ask a lot of questions. Some will seem obvious, but others you may not have thought of.
Here’s a sampling:
- How old are you? (If you’re 100, your chances of dying in the next year are greater than if you’re 18, aren’t they?)
- Is either parent deceased? What did they die from? At what age? (It might be in your DNA.)
- Are you healthy? If not, what health problems do you have? Which medicines do you take?
- When’s the last time you saw a doctor? What was the reason?
- Are you the right weight for your height? (The guy who said, “According to the charts, I’m about six inches too short” is going to pay more for insurance, because of his greater chance of dying soon. There’s no good way to sugar-coat that.)
- Do you use tobacco? Oh, you used to, but you stopped? That’s good, but how long ago did you stop?
- Do you get a lot of traffic tickets? (Yeah, that’s a factor, too.)
- Are you a pilot (I bet you didn’t think of that one, but statistically people who fly planes don’t live quite as long as people who don’t. The insurance company isn’t concerned if you fly as a passenger, but they do want to know if you’re a pilot.)
- Do you travel overseas a lot? You do? Which countries? (After all, some are safer than others.)
- Do you have a problem with substance abuse?
Think again of our identical twins applying for life insurance, but with very different lifestyles. Can you see how the one who’s never seen a doctor, is overweight, drives too fast, smokes, and pilots a plane while drunk is going to pay more for life insurance?
You can’t control your heredity. But there are other risks you can control. The operative word is “mitigate.” There are risks you can make less severe.
Here are the seven factors that affect your life insurance quote. You can’t do anything about some of them, but you can do something about many of them.
Why Do You Need a Life Insurance Physical Examination?
If you’re buying more than the smallest policy, you’ll probably be told you need a physical exam by a paramedical examiner. This medical professional will come to your home or office (at your convenience) to weigh you, take a urine sample, and maybe a blood sample.
You won’t have to take your clothes off, but you will be asked questions about your health. If you’re looking for higher amounts of coverage, they may check your heart. (It’s painless, and you get to lie down for this part.)
If your health is a little iffy, they may contact your doctor, too, for what is called an Attending Physician Statement.
The idea is simply to make sure that if your risk is low, you don’t have to pay as much for coverage as someone whose risk is high.
Here’s Something Interesting You Might Not Know
Did you know you can take out an insurance policy on your spouse, but not on the guy who lives next door? It’s true. Think about it. If your spouse died and you got $500,000 you’d still feel awful.
But if something happened to the guy next door and you got $500,000, well, … you’re suddenly $500,000 richer, plus you’re rid of your neighbor who practiced his drums into the wee hours. (Downside: you might find yourself playing the starring role in a murder trial.)
The insurance company has a name for this particular concern. It’s called “insurable interest.” Do you have personal reasons for wanting the person to remain alive? Would you be at financial risk if the person were to die?
In the case of your spouse, yes. Your noisy neighbor? Uh-uh. Without the concept of insurable interest, folks would be taking out policies on tramps and hobos, and suddenly we’d have a higher rate of unsolved murders.
The insurance company has a special department that takes all this information, combines it, probably does a chant over it, and comes up with a rating that represents the risk the company will take on when they issue a policy for someone who wants to be insured. (Yes, wants to be insured. You can’t take out a policy on someone without their permission. (See the sidebar, “Here’s Something Interesting You Might Not Know.”)
The risk-assessment department is called the underwriting department. Here’s what it boils down to when it comes to life insurance:
There are two groups of people in the country: those who will be alive 365 days from now and those who, sadly, won’t be. The underwriters (and their buddies, the actuaries) can tell you how many people will be in each group. They actually study those things. They may not know which people will be in each group, but they know how many.
And based on the information the insurance company receives about you, they have a pretty good idea which group you’ll be in.
[Download a free Report here that reveals how a little-known type of high early cash value, low commission whole life policy lets you fire your banker, bypass Wall Street and take control of your own financial future. You’ll also get a free chapter from Pamela Yellen’s New York Times best-selling book on this subject.]
Life Insurance Ratings
Depending on the verdict of the underwriter assigned to your life insurance application, you’ll be assigned a risk level. Sample risk levels include:
- Standard. The average person falls in this category, because he or she represents an average risk to the insurance company. This person will pay a premium that’s “average” for others of their age and sex. (Some insurance companies charge men of a given age a little more than women of the same age, because women live longer. Other companies lump both sexes together and average it out.)
- Tobacco. More risk than Standard, hence higher premiums (usually, a lot higher).
- Preferred. Less risk than Standard, hence lower premiums.
- Super-Preferred. Way lower premiums.
- Substandard. Not so good. You’ll have to pay more. Back before computers, there were life insurance ratings tables that listed the substandard rates, depending on exactly how much substandard. If you’re told you’re table-rated, that means you’re substandard and will have to pay more. People on Table B pay more than Table A. Those on Table C pay more than B, and so forth, down several levels. Below that, you’re …
- Uninsurable. If you’re on your deathbed, or if you’re a 90-year-old pilot who gets in frequent traffic accidents, likes to visit some God-awful country a lot, and habitually pops pills, you won’t get the type of life insurance policy you want. Or, if you have a combination of problems, you may be uninsurable.
In a way, it’s rather perverse, isn’t it? Those people who pose the least risk pay the lowest premiums, while those who pose the greatest risk may need life insurance the most.
You Have the Power to Control Most of Your Risk Factors
Do what your doctor says. (You do have a doctor, don’t you?) Lose weight (sensibly). Floss. (Actually, they don’t ask about flossing, although maybe they should. Your dentist will tell you that people who floss live slightly longer than people who don’t. It has to do with gum disease.)
Don’t skydive. If you’re thinking about taking up the hobby, get your life insurance policy first, then make your first jump. For the most part, the insurance company is more interested in what you’ve done in the past, than what you say you’re going to do in the future.
When all is said and done, your decision whether or not to purchase life insurance should be based on your need for life insurance, not your risk.
But to make it more affordable, do what you can to minimize your risk.