Costs of Life Insurance

The cost of life insurance is generally made up by a combination of the cost of risk cover, commission payable, expenses or policy fees and the cost of investment where applicable.

The cost of risk cover is the cost of life cover and any other risks added to the policy such as disability or dread disease. The cost of this will depend on how much cover you require, the risk that you present to the life insurer, and the company’s own way of calculating the cost.

The main criteria for determining risk costs are age and gender. Insurance companies often use mortality tables that show the number of deaths per 100,000 of the population at each age. Apart from a spike between the ages of 18 and 24, the trend is that as you get older, the risk increases. The risks are higher for males than for females.

One of the available mortalitiy tables, for example, shows 90 deaths per 100,000 of population at age 26. The cost of the risk is therefore $90 for each $100,000 of life cover. At the age of 40, the risk has increased to 195 per 100,000 or $195 per $100,000 cover.

Naturally, the insurance company must build a margin onto the risk that allows it to make a profit. The premium may be smoothed for the life of the policy.

Other factors influence the costs of cover. Smoking represents a serious risk and the premium will reflect this. Participation in hazardous activities such as sky-diving could result in an additional premium or an exclusion from the policy. A history of heart disease or other serious diseases will probably result in additional costs. Women live longer than men, so it is usually cheaper to insure a woman than a man of the same age.

The next major cost of life insurance is the commission payable to the intermediary or broker. For whole-life and investment type policies the commission is substantial. A term policy attracts much lower commission. Term insurance provides straightforward cost-effective life cover in most cases as most of the money goes to cover the risk.

Investment type policies are generally very expensive. The commission could eat up the bulk of the first year’s premium and will seriously impact on the eventual value of the policy.

Some insurance companies charge a policy fee, and expenses may be charged against the policy. Investment type policies often incur expenses that are higher than those charged for straight investments.

When buying life insurance, it is a good idea to get quotes from a number of companies. The difference could be significant. Term insurance is the best and most cost-effective type of life insurance. Investments and life-cover are an uneasy combination and the charges that accrue are prohibitive. Rather invest directly into a managed fund, unit trusts, equities or property.