There's a long list of things that affect life insurance rates. Most are obvious. Life insurance is priced on how likely you are to die while a policy is in effect, so if you're older, ill, on certain meds, a smoker, etc. it's going to up your premium. Sometimes a health condition leads to a straight-up denial. That’s upsetting, for sure, but probably not all that surprising. A life-threatening illness, after all, is life-threatening. But here's something you probably don't know: Your personal finances can keep you from life insurance, too.
Why life insurers care about your financial health
You’ve probably heard insurers pull your credit report when you apply for a policy — and a bad score can lead to a higher premium. That’s certainly true, but financial underwriting for life insurance is a little more complicated.
Insurers want assurance you won’t let a policy lapse, hence, the credit check that (hopefully) indicates you have a habit of paying bills as agreed. But they’re also looking for a financial justification to insure you. See, most people buy life insurance to help their loved ones cover expenses in the event of their untimely death. The idea here is your family relies on your income to pay the bills. But if you don’t actually need that financial safety net — say, you’re a non-earning parent or a retiree applying for term life insurance — the insurer could turn you down, perfect health notwithstanding. (Genius tip: Non-earning spouses can get as much coverage as a working spouse, sometimes up to $1 million, when both are applying for policies.)
Your income determines how much life insurance you can get
Chances are, you’re applying for life insurance because you need life insurance. While a denial is possible, you’re more likely to encounter an unexpected coverage limit. Insurers want to make sure you’re not over-insured — meaning you’re signing yourself up for premiums you can’t pay or you’re buying so much life insurance you’re effectively worth more dead than alive. (Sorry — there’s really no other way to put that.)
To determine a proper amount of coverage, most insurers supply underwriters with what’s known as an income replacement table. It specifies how much coverage you can get by assigning a multiple of income to your age. They assume your income will rise over time.
Every insurer’s income replacement table looks a little different, but generally, the younger you are, the higher the multiple. So, if you’re under 30, you might be entitled to a policy of up to 30 times your income. If you’re 31 to 41, you might cap at 25 times your income. Here’s an example of what an income replacement table might look like:
|Age||Multiple of income|
|Under 30||30x||31 to 40||25x|
|41 to 50||20x|
|51 to 60||15x|
|61 to 65||10x|
|65 and over||5x|
Getting the coverage you need
Every insurer is different and, just like with certain health conditions, some companies are more flexible than others when setting coverage limits. Plus, many will consider writing a policy out of step with their income replacement table if the applicant can provide documentation that demonstrates their financial need and ability to pay. Other exemptions or exclusions may apply. Our Policygeniuses can help you find an insurer that’s the best fit for you. You can start comparing life insurance quotes here.
Image: Milan Marjonovic