Factors affecting Premium
Why do men pay more for the same insurance plan than women? Why do annual premium payments have better rates than monthly payments? What are the factors that influence the premium? Whatever is puzzling you, let Bowtie help you out!
With the purchase of an insurance policy, a specified risk of loss is passed from the policyholder to the insurer. An insurer prioritizes estimating the likelihood of each policyholder to experience risk and to what level. In general, an insurance company’s actuaries use a Mortality Table to calculate the Cost of Insurance for people at different ages. Other factors, such as expected rates of interest and reasonable profit margins, are also taken into account to determine what rates, or premiums, to charge for insurance. Since the structure of each policy may vary by product, and each policyholder has a unique risk profile, insurers evaluate a number of other factors when determining premiums.
1. Personal Factors
Even for people of the same age, each individual’s mortality risk can be different because of personal risk factors. Such factors that influence life insurance premiums include:
Women tend to live longer than men. According to the Department of Health, the life expectancies at birth for males and females in Hong Kong are 82.9 years and 88.0 years respectively in 2020. Therefore, women generally pay less for life insurance than men do.
Besides gender, age is also a significant factor. It’s no secret that our bodies change as we age. Physical functions inevitably decline with age, causing a number of illnesses and discomforts. As a result, the elderly use far more health care services than do younger people, and their risk of death is likewise higher. Hence, life insurance rates increase as you get older.
If your BMI is above normal or you suffer from such conditions as high blood pressure, high triglycerides, and high blood sugar, your mortality risk is comparatively higher. Since insurers price premiums based on the presence of health risks, in general, insurers tend to charge smokers higher premiums. Harmful substances such as nicotine and tar in tobacco increases the risk of deadly cardiovascular diseases, such as cancer, heart disease, and stroke. Studies have shown that cigarette smokers are 2 to 4 times more likely to get a heart attack than nonsmokers. Young smokers are no exception.
Your rates can be affected if you have a family history of genetic diseases, such as cancer or heart disease. However, family health history mainly impacts critical illness or medical insurance. Family history affects your life insurance rates minimally, if at all.
In short, “health risks” is the factor that directly impacts your premiums.
2. Types of Insurance
Most life insurance products on the market belong to one of two categories: (1) those with a savings or investment component and (2) pure protection.
A pure protection policy, with no element of savings, dividend or investment, is concerned solely with the protection of an individual against the risk of financial loss in case of death. Since the insured is not obliged to pay extra for building cash value, premium payments on a pure protection life insurance policy are usually lower than those on a cash-value policy.
3. Sum Assured
The premiums you pay for a policy are decided against the sum assured value. Normally, under the same conditions and with the same insurance product, the higher the sum assured, the higher the premiums.
Take Bowtie Term Life, for example, for a policy with $1 million in coverage, the monthly premium is HK$53; for a policy with $500 thousand in coverage, the monthly premium is HK$27*.
- *Based on average rates for a 35-year-old male nonsmoker
4. Types of Premium
When you take out life insurance, you’ll often be given a choice between two ways of paying your premium, namely (1) Level Premium and (2) Stepped Premium.
Level premiums don’t increase as you age. Instead, your premiums are locked in at a fixed rate for the duration of your policy (typically 5, 10 or 20 years). Conversely, stepped premiums increase over time as you age.
However, once the term period ends, the premiums for a level term policy might be adjusted. Therefore, it’s possible that the level premium will not be that much different from the comparable stepped premium. For a better comparison, you may ask the insurer for information on different premium structures. In general, while level premiums are usually higher in the early years, stepped premiums can become much more costly if you retain the insurance over a longer period.
5. Premium Promotions
Insurers often offer discounts to encourage more people to take out insurance. If you apply for insurance within a specified period, you may enjoy lower premiums. Offers and perks may include premium waivers, premium rebates, free policy upgrades, and free health exams, etc.