How Is My Life Insurance Premium Calculated?

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Updated: 08 October 2023
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Insuranceopedia Staff
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Key Takeaways

  • It isn’t just your age and lifestyle that determine what life insurance premium you will pay.

Like most insurance, life insurance premiums and calculations can be pretty complicated to understand. It’s not uncommon for clients to ask “how is my life insurance calculated?” So here’s an easy-to-digest breakdown on how life insurance premiums are calculated.

What Are Life Insurance Premiums?

It’s important to remember that the sale of life insurance is a business. And, like all businesses, there are many factors that need to be considered to be profitable. Companies have to make sure that they can pay their bills, understand risks and still make a profit.

In the case of life insurance, we can think of “the bills” as death claims that have now become due and payable. The risks would be factors such as age, gender, smoking, health, lifestyle and family history. Unfortunately, like most businesses, these are just the known and common risk factors. Often there are other factors, such as financial markets, inflation or an unforeseen pandemic that also can impact costs and profitability. Here’s are a few examples of life insurance premiums in various cities and states:

How Is My Life Insurance Premium Calculated?

When the calculation is being made for life insurance, companies are looking at your age and gender only as a starting point. They also need to adjust for the amount of insurance, type and length of policy you are looking to purchase, all of which play into the costs of the policy.

Read: How Much is $500k No Medical Exam Life Insurance

Then the insurance company needs to figure out what other risks will increase the possibility of additional payouts. Finally, the insurance company decides how much extra they are going to charge for the additional risk. As an example, smoking is one of those factors that is likely to cause them to pay out more. This causes an increased percentage or rated amount of premium on top of the base premiums that would make up the new policy premiums.

For this reason, insurance companies use professionals called actuaries. Actuaries analyze financial risk using mathematics, statistics and financial theories. They are the starting point for determining the premiums based on each company’s target clients.

In the insurance industry, these actuaries help insurance companies determine good risks. Good risks are those clients that companies are less likely to have to pay out claims for. This is also known as the company’s target or preferred client market. These calculations determine how much it will cost to pay claims and how much money the insurance company should collect to pay potential claims while still making a profit.

Read: How to Collect a Life Insurance Payout

Is My Premium Affected by Financial Markets?

When the insurance company collects your premium, they set the money aside to earn a return on the investment. These funds continue to grow every year you don’t have a claim.

If the insurance company pays out less in claims and expenses than what they collected, they will be profitable that year. In years when the financial market return is good, they will make more money and be more profitable.

Unfortunately, the opposite is also true. For example, if the insurance company’s actuaries review the financial markets one year and predict a higher return, they may charge minimal premiums that year for new policies.

If by the end of the year they see a drop in markets and generate less return than anticipated, it could cause them to review their results and change the premium they charge going forward on the same policies.

Why Are Some Premiums Cheaper Than Others?

When it comes to pricing and premiums, it’s important that you are always comparing apple to apples, or insurance coverage to insurance coverage in this case. Often, each company has a few minor differences in what they are offering, which can easily justify a price difference. With that being said, the biggest factors that account for equivalent policies being priced differently are claims history and their target markets.

Read: How to Get a Life Insurance Quote Online: The Good, the Bad and the Ugly

If, for some reason, a company has a larger number of claims in a group that they had not anticipated, they would need to have an adjustment in premiums to offset the increase in claims paid out. Often you may see that only certain groups have higher premiums when compared across multiple life insurers.

Insurance companies do not have a standard price that goes up by age only but often have a target market that they want to be competitive in. This means the secret to getting the best deal or lowest premium is finding the insurance company that is most interested in insuring you. Often you can see by marketing or sales strategy who a company’s target market might be.

Depending on the company’s strategy and target market, what might be good for one person may not be the best deal for the next. Here is an example to illustrate this; the monthly cost of life insurance in Georgia is $61 for $1,000,000 (20-year term life insurance) vs the monthly cost of life insurance in New Jersey, New York, and Ohio is $25 for $1 million (10-year term life insurance).


It’s important to remember that like anything, insurance companies are basing the pricing or premium on many factors outside your control. In many cases, these factors have much more to do with business strategy, claims history, and economics than your lifestyle choices. It’s always best to shop around and make sure that you understand what you are purchasing paying for when it comes to insurance.

Find Out Now: Get a Life Insurance Quote Online

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