Insurance Q&A: “Why does life insurance cost more when you get older?”
Life insurance companies make money based on how long you live after the policy is issued, otherwise known 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.
A Younger Person Will Generally Pay More to the Life Insurer
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.
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 months).
Statistically, you probably won’t die while this policy is active, and the life insurance company will collect $2,000 in premium ($16.67 X 12 months X 10 years) from you.
For a relatively minor monthly payment, your beneficiaries are covered (at least for a decade) 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 months). If the policy goes to full term, or the entire 10 years, you would pay $20,000 in premium ($166.67 X 12 months 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 would lose $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.
Is Life Insurance Harder to Qualify for When You Get Older?
This is a common misconception regarding life insurance. While it is entirely accurate that life insurance companies charge a higher policy premium as we get older, there is no truth to the rumor that coverage is harder to obtain.
Life insurance companies make money by essentially gambling on how long you will live. The longer you live (and pay premium) the more money they collect and invest to earn money for their company.
If you purchase a policy and suddenly die, the insurance company loses big, as they have to pay out your policy limit to your beneficiary. If this is the case, they may not have collected enough premiums from you to invest.
These facts regarding life insurance only reveal that coverage is more expensive as we age, not harder to qualify for. If you are willing to pay more money, you can usually obtain coverage in the open market.
However, this doesn’t necessarily include pre-existing conditions, which can make life insurance coverage harder to come by.
The Cost of Life Insurance May Outweigh the Benefits
Of course, at some point it may not make sense for a life insurance company to offer coverage.
In the event you have a statistically overwhelming chance of dying before a policy term ends, an insurance company would not be able to charge you a rate that makes sense for them or you.
For example, purchasing a life insurance policy on you 97th birthday isn’t a good idea. The insurance company would have to charge you an astronomical amount of money (near the exact cost of the death benefit) in order to ensure they make out.
You’d maybe pay $49,000 (in one lump payment) for $50,000 in coverage.
Remember, the higher the odds the insurer has to pay out money, the greater the cost.
Taking all this information into account, you should purchase life insurance if you need it. Any reasonable professional would not recommend purchasing a life insurance policy simply to make sure you qualify for coverage in the future.
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.