Why Does Life Insurance Cost More When You Get Older?
Life insurance companies make money on their policies based on how long you live after the policy is issued, otherwise referred to as how long the policy is “in force.”
The older you get, generally the rate, or amount it costs you per $100 of coverage, is higher. A higher overall rate leads to a higher premium (How much life insurance do I need?)
If you purchase a life insurance policy when you’re younger, and continue to pay into it for many years, the insurance company will collect more premiums before they have to pay out the value of the policy. This, of course, means they make more money on the policy.
Conversely, if you purchase a life insurance policy when you’re older, the odds are you won’t pay as much money into the policy before the insurance company has to pay out the value. As a result, the insurer will want to collect a higher premium to offset the risk of an earlier payout.
Let’s look at an example of both:
Scenario 1, 30-year-old:
You purchase a 10-year, $100,000 term life insurance policy at a rate of $2.00 per $1,000 of coverage per month. Your total monthly payment would be $16.67 ($2.00 X 100 / 12 mos.). Statistically, you probably won’t die while this policy is active, and the insurance company will collect $2,000 in premium ($16.67 X 12 mos. X 10 years) from you. For a relatively minor monthly payment, your beneficiaries are covered in the tragic event you die before the natural life expectancy of 78.
Scenario 2, 70-year-old:
You purchase a 10-year, $100,000 term life insurance policy at a rate of $20.00 per $1,000 of coverage per month. Your total monthly payment is $166.67 ($20.00 X 100 /12 mos.). If the policy goes to full term, or the whole 10 years, you would pay $20,000 in premium ($166.67 X 12 mos. X 10 years). In this example, the odds are you will pass away before the policy has expired, and the insurance company will likely have to pay out the $100,000 to your beneficiary. This means your insurer could lose as much as $80,000 overall, assuming you died on the last day the policy was active.
The above example illustrates exactly why insurance companies charge more money for older individuals. Statistics guide most of the pricing and can provide a solid basis for premium determination.
If life insurance is right for you, it’s a good idea to have a policy in the event the statistics don’t work out in your favor. The benefits vastly outweigh the minor cost of coverage in most cases.