How Term Life Insurance Pricing Works

How Term Life Insurance Pricing Works

Term life insurance pricing is confusing.

It looks something like this: Get a quote (tentative price), submit an application, get another quote (final price), decide how to pay (annual, monthly, etc.), get another quote for that… You get the picture.

There are so many variables and moving parts it’s difficult for many people to grasp. But if we break it down to its core elements and take a peek at the role each one plays, the moving parts slow just a bit and a clear picture starts to form.

Factors that Influence the Cost of Term Life Insurance

1. Gender

All else being equal, rates are lower for females than males. This is mainly because on average women live longer than men. According to the most recent life expectancy tables from The Centers for Disease Control, nearly five years longer!

Rating Class
Policy Risk
Policy Cost
PreferredLowLeast Expensive
Sub-StandardHighMost Expensive

2. Age

You won’t be too surprised to learn life insurance gets more expensive as you get older. Makes sense, since your risk of death also increases with age.

Life insurance rates increase gradually in your 20’s and 30’s. There aren’t any big jumps until you hit your 40’s. From then, they can increase substantially from one year to the next.

3. Term

Term life insurance comes in ‘terms’ of 10, 15, 20, 25 and 30 years. The term is simply how long the policy will last. Most modern term life policies come with a rate guarantee that matches the term. For example, buy a policy with a 10-year term at $500 per year, and you get ten years at the $500 per year rate. The rate stays the same for the entire term.

For that reason, longer term policies cost more. As you get older and your health changes, the life insurance company’s risk also increases. The likelihood of incurring a death claim on your policy is greater the longer the policy is in force. Also, since your rate is ‘locked in’ for the entire term, the company cannot pass along increased claims or operations costs in the form of higher premiums.

4. Amount

Again, no surprise here. The higher the death benefit, the higher the cost. However, life insurance is priced by rate bands, as they’re called in the industry. Smaller policies fall into the lower bands, which have a higher unit cost. Larger policies, although they cost more overall, actually have a lower unit cost.

This table demonstrates how unit costs affect policy pricing.

10-year Term Life Policy Cost
Policy Year
Annual Cost

You can see the more life insurance you buy, the lower the unit cost is. For example, a $500,000 policy doesn’t cost twice as much as a $250,000 policy because the unit cost is lower ($0.45 vs. $0.40). You save a bit with a larger policy.

5. Mode

The payment mode is the frequency in which you pay for the policy. The available modes, in order of increasing cost, are:

  • Annual
  • Semi-annual
  • Quarterly
  • Monthly

There are two reasons it’s more expensive to pay for your policy over a longer period. First, the company incurs higher administrative costs to bill you and process your payments several times a year versus just once. Second, the company places premiums it receives in investment accounts, thus earning interest on those funds. The longer they have to wait for your money, the less money they make in interest. So they reduce this risk by charging you a little more for paying in installments.

6. Company

Like any other industry, different life insurance companies charge different rates for their products. Some companies have higher operating costs, bigger marketing budgets, etc. Others may have parent companies or investors to answer to. Thankfully, competition within the term life marketplace is fierce, which helps to keep costs reasonable and reasonably comparable from company to company.

Another factor for pricing differences is companies target specific niches of customers. For example, one company may target younger individuals applying for large policies. Another may go after applicants with excellent health, and yet another could seek female customers more aggressively.

You may see this strategy in action if you compare quotes for you and your spouse. For example, assuming you’re about the same age, health and are applying for the same amount of coverage, the top quotes may come from different companies based on gender alone.

7. Rating Class

I saved the best – and most confusing – component for last. The rating class you are assigned to after underwriting has arguably the biggest impact on your cost. It’s also the biggest mystery and the one pricing variable, aside from gender and age, you may have little control over.

Rating classes are risk categories that life insurance companies place you in based on the risk you represent. The better the class, the less you’ll pay, and vice versa.

If you take care of your health, eat well and maintain a healthy weight, you might be rewarded with a Preferred rating class or even better. Have a history of speeding tickets and reckless driving? You could find yourself in a Standard class or worse.

Rating classes vary by company, but all companies use the same basic convention, as illustrated by the following table.

Parent30%Child 133%
Charity20%Child 233%

So there you have it:  The seven factors that influence how much you’ll pay for your term life insurance policy. Not quite as complicated as figuring out Google’s search algorithm, but close.

You’re now equipped to put together an action plan for saving money on your policy. Start sooner rather than later (age), buy only what you need (amount and term), compare quotes (company) and get your health in order (rating class) and you’ll be well on your way!

Tim Bain

Tim is a licensed life insurance agent with 23 years of experience helping people protect their families and businesses with term life insurance. He writes and creates stuff for QuickQuote and other insurance and financial websites. You can find him on Twitter.

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