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Explained: How a Life Insurance Premium Is Determined

Like may other industries that calculate a payment obligation, the life insurance industry also follow's a formula - a rather meticulous formula.

The most common form of life insurance is term insurance - so we will use term insurance as the basis for our understanding of how a life insurance premium is determined.

Life insurance premiums are simply a combination of the following:

  1. Mortality costs experienced by an insurance company

  2. Expenses incurred in providing insurance

The Mortality cost

On a per policy basis, the annual mortality cost is estimated by multiplying the policy's face amount by the life insured's probability of death during the year.


Face amount = $1,000,000 x mortality cost (determined by the insurance company)

The insured's probability of death depends on many factors, such as:

- age

- gender

- health status (i.e weight, smoker vs. non-smoker)

In other words - the younger and healthier you are, the cheaper your insurance premium will be. This is why life insurance brokers like myself always suggest getting insurance when you're young and healthy!

After you've submitted your life insurance application to life insurance company, your policy will go through an underwriting process.

During the underwriting process, the life insurance company tries to estimate the life insured's probability of death by classifying him/her in a group of similar people with known mortality experience.


In addition to mortality costs, there are some additional costs to administering your policy that the insurance company incurs directly:

- the cost of selling the policy (i.e commissions to agents)

- underwriting the policy (i.e undertaking medical exams)

- issuing and administering the policy

- investigating claims

- paying death benefits**

If the life insurance company invests the premiums, the resulting investment income may be used to offset expenses.

** as you can imagine, the COVID-19 pandemic has resulted in a rise of paying out death benefits, which in turn increases the expenses that the insurance company will incur, thus resulting in an increase of premiums for those wishing to obtain term insurance**

Note: For other types of life insurance products, for example whole life, there are some other factors that go into determining a premium.

Whether you're looking for yourself, or for a loved one, a broker like myself will be able to provide you with a quote on what you'd be paying per year, or per month, for a sum of life insurance.

You can call me or text me at 647-393-3474

Thanks for reading!

- Dan



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