How does age affect term life insurance rates?

How does age affect term life insurance rates?

One of the most common questions people have about life insurance, after, "Do I really need it?", is "When do I need it?"

It depends on your individual financial needs, but if you’re looking for something a little more specific, consider this: you should get term life insurance when you’re young.

I know, it doesn’t make sense, right? Younger people have fewer financial needs, fewer dependents...if they were to (sadly) die early, what do they need that money for?

But it isn’t about what they’d need it for when they’re young. Like most things finance-related, it’s about planning for the future.

Purchasing life insurance when you’re young can save you a lot of money in the long run, because how much you pay for premiums depends a lot on your age.

Life insurance classifications and premiums

To understand how your age affects your life insurance premiums, we should step back and talk about how premiums are set. We gone into this in depth before, but here’s a quick refresher:

Insurance companies want to know how risky you are to insure, because that determines the likelihood of whether or not the death benefit will be paid out on a policy. The higher a risk you are to insure, the more likely you’ll die during the term of your policy, and the higher your premiums are going to be.

Insurers use a number of factors to decide how risky you are. Your health and health history is obviously important, which is where things like medical exams and attending physician statements come in. Then there are lifestyle details, like your drug and alcohol use or your scuba diving escapades.

The insurer takes all of that information to assign you to a classification; a Preferred Plus rating gets you the best deal on premiums, and a Standard rating gets you...well, standard rates.

Why age matters

The point of all of this is to say, bluntly, that if it looks like you’re more likely to die while you’re insured, it’ll cost more to be insured. Life insurance premiums are set for the term of the policy when you apply, so if you apply when you’re younger – and likely healthier – you’ll get a better deals based on the classification criteria we talked about before.

The reason why your premium doesn’t increase every year as you get older is because the annual costs are averaged at the time of your application; your younger, cheaper years offset the more expensive end of the term. If you wait to get life insurance, you’re losing out on the earlier years that lower your average, so you end up paying more.

Premiums increase by an average of 8-10% for every year you put off being covered. That goes up more quickly as you get older; rate increases by 5-8% per year for people in their 40s but 9-12% per year for people over 50.

Aside from the bump in premium costs, waiting until you’re older to buy life insurance can cause annoyances during the application process. You might have to do additional tests like EKGs that you wouldn’t have to worry about if you were younger, and cognitive testing for older applicants have been on the rise as insurers look for ailments such as dementia.

Life insurance options for older people

Having to pay more for life insurance doesn’t necessarily disqualify you from actually getting it. It just means that it’ll cost you a little extra every month. But if the choice is between that and not having any financial protection at all for your family once you’re gone, the additional money is a little easier to swallow.

Of course, if you put off getting life insurance for too long, you might be deemed uninsurable. That doesn’t mean you’re completely out of options, though. Final expense insurance is a type of insurance specifically for burial costs, so you can at least have that covered; guaranteed life insurance is issued as long as you can afford the premiums; and simplified life insurance, also known as no exam insurance, will let you skip the paramedical exam if that’s what’s keeping you from being insured.

As with all good things in life, there’s a catch. Insurers use paramedical exams and classifications to appropriately rate people – and their premiums. If you use one of the alternative insurance types listed above, which bypass these rating systems, you’ll pay for it, literally, with higher premiums.

If you’re young, it might be hard to think about the things you need life insurance for – a mortgage, college savings for your children, and more – but it can save you big in the long run. Like with 401(k)s, investing, and virtually everything else involving money, getting a head start can mean the difference between financial security and struggling to make ends meet.

Image: Moyan Brenn