Life insurance premiums explained

How to calculate life insurance premiums

If you’ve compared a few life insurance quotes, you’re probably wondering why each one is different. Life insurance is about risk. It might sound a little morbid, but life insurers are trying to figure out how likely you are to die. Each insurer uses their own data to calculate your level of risk. The way insurers calculate risk is unique to each company.

There are a few different factors that go into the calculation. First, there are personal factors. That’s things like your age, medical history, gender and occupation. If you’re older, or have a history of illness, it will push your premium up. If you start the policy when you’re young and healthy, it’ll cost less.

Then there’s the type of cover you want. You could choose term cover. That’s where you’re insured for a fixed number of years. Or there’s whole life insurance, where you get a payout whenever you die. Whole life insurance will cost more because the insurer will always have to pay at some point.

It also depends on how much cover you want or need. People with big debts, such as mortgages, would need a bigger payout if they died. So, the insurer will charge higher premiums. But if you’d paid your mortgage off, your loved ones wouldn’t need so much money to get by. This would make your premiums lower.

Do life insurance premiums increase every year?

It depends on your policy. If you have a guaranteed premium life insurance policy, you’ll pay the exact same amount till the policy ends. But if you have a reviewable policy the insurer has the right to increase your annual premiums. 

You can choose between a guaranteed premium or a reviewable policy. The reviewable policy will usually be less expensive to start. But, by the end, you could be paying a lot more each month. 

Can someone else pay my life insurance premiums?

Yes and no.

Generally speaking, other people can’t pay your personal life insurance premiums. The one exception is insurance offered by your employer. Your company might have a ‘death in service’ benefit. If you died, the company’s insurer would pay out to your family. 

Insurance companies only accept this if there is an ‘insurable interest’. This means that the policyholder would lose out financially if you died. There are a handful of circumstances where this might happen.

One example is business partners. If you died, your business partner would stand to lose money. That means there is an insurable interest. The same goes if you owe someone money that you plan to repay. But, if you die, they wouldn’t receive their dues. People might also take insurance out on you if you have irreplaceable skills. For example, a celebrity’s agent might take life insurance out on them, because they’d lose money if the celebrity died.

Another is people who depend on you. That could be an ex-partner who relies on you for child support, or parents who rely on you for income.

There are often alternatives to taking life insurance out on someone else. For example, a joint life insurance policy shared between spouses is very common. It would often be easier (and cheaper) than each spouse taking out a separate policy on the other.

Learn more: Joint vs single life insurance explained

Last updated: 18 November 2024

*Vitality Claims and Benefits Report, 2024