How Life Insurance Premium Is Calculated?

how life insurance premium is calculated

Taking out a life insurance policy is one of the best ways to give your loved ones financial stability and provide them with assistance in the event of your death.

However, before they can receive the payout, you need to put some resources into your policy first. For that, you need an agreement with your insurer. Once everything is set, you can start financing your policy. On the other hand, if you already have a life insurance policy, you may wonder why the costs are prone to change.

If you want to find out how life insurance premium is calculated, read on. You may find useful information that may even help you reduce your premium costs.

What Is Life Insurance Premium?

A life insurance premium is an amount of money you pay for your life insurance policy, usually on a monthly basis.

If you continue to make these payments, your life cover will remain in place. It should pay out in the event of your death – that’s when your beneficiaries need to make a claim.

Your cover could lapse if you miss a payment. As a result, you could be without life insurance, at least for some time. Also, you might need to take out a new policy to get your cover back in place, often at a less favourable rate.

How Are Life Insurance Premiums Calculated?

There is no fixed formula that universally calculates premium amounts for everyone. However, underwriters use statistical analysis and mathematical equations to come up with a fair score.

Since a universal life insurance calculator simply does not exist, insurers use different methodologies to calculate premiums. This means that different companies may offer the same policy type at different prices, which is why it’s best to compare quotes and take your time while looking for the best deals.

Nevertheless, insurers take into account a number of personal and policy-related factors to calculate your premiums. Read on to find out what they are.

Personal Factors That Affect Life Insurance Premiums

Listed below are personal factors that influence how life insurance premiums are calculated:


Simply put, the more likely the company is to pay out your policy, the more your premiums will cost. Your age is one of the most significant risk factors for insurers, meaning the younger you are, the lower life insurance premiums you’ll have to pay.

Nevertheless, you can qualify for a policy even later in your life. For people aged 50 and above, over 50s life cover is the best solution. This type of policy will cover them for the rest of their lives. Still, insurers may calculate premiums based on significant lifestyle factors, such as smoking.

life insurance premium calculation formula

Smoking and Substance Use

Age and, by extension, life expectancy are some of the most important factors considered when calculating life insurance premiums. As such, your insurer will also consider other factors that can directly influence your longevity.

Smoking is known to be a common reason behind a shorter life expectancy. Researchers agree it increases the risk of contracting critical illnesses, such as lung or throat cancer. You can expect to get a higher insurance premium if you’re a smoker. Sometimes, the difference between life insurance premiums for smokers and non-smokers can be twice as large.

Similarly, frequent alcohol consumption and the use of recreational drugs are considered as posing a risk to your health and leading to a shorter life expectancy. As such, they’re very likely to result in you having to pay higher premiums.


Some careers are considered more high-risk than others. As such, these jobs are usually charged a higher monthly premium.

Such occupations include:

  • Military positions
  • Police officers
  • Prison officers
  • Firefighters
  • Fishermen
  • Offshore workers

Family Medical History

Your premiums will be more expensive if you have any existing health conditions or have had any serious illnesses in the past. Similarly, your insurer would like to know whether there are hereditary conditions or other serious health issues in your family medical history.

The presence of certain medical conditions means an increased risk of death and, therefore a higher risk to the insurer. However, if you manage to prove that you have fully recovered from an illness or show that you’re effectively managing a chronic health condition, your insurer may agree to lower premiums.


BMI, or the Body Mass Index, is something insurers also take into consideration while calculating your premiums. BMI is used to determine whether you’re a healthy proportion. Being under- or overweight poses some risks to your health, for example, heart disease, high blood pressure, or type 2 diabetes, which can affect your lifespan. This, in turn, results in higher premiums.

how life insurance is calculated

Mental Health and Suicide

When you’re applying for life insurance, both your physical health and mental wellbeing are taken into account. However, documented mental health problems, previous suicide attempts, or instances of self-harm will not prevent you from being accepted for life insurance.

Keep in mind that your potential insurer will take into account the length of time since the occurrence and the treatment received. Additionally, the treatment (or lack thereof) and the impact of such issues on your life are likely to influence the cost of your life insurance premiums.

In order to receive life insurance cover, you’ll have to provide your company with specific information regarding your physical and mental health. However, your insurer may also obtain certain information from your GP. As such, you need to be honest and provide them with true statements.

Policy Factors That Affect Insurance Premiums

Next to personal factors, your monthly premiums can be affected by a number of policy-related factors. These include:

Length of Cover

In the case of fixed-term policies, the longer the term, the higher the monthly premium. This is because your insurer is more likely to have to issue a payout the longer your cover lasts.

When it comes to the whole of life policies, which cover you until you pass away, you can usually have a set period for fixed life insurance premium rates – typically, it’s 10 years. Once this period is over, your insurer reserves the right to review your premium. If you have developed any serious medical conditions or suffered any medical issues during this time, you can expect a potential increase in your premiums.

Extent of Cover

Similar to the previous point, the extent of cover you want to get will influence the cost of your life insurance premiums. By the extent of cover, we mean the size of any potential payout.

Simply put, the more cover you want, the higher premium you must pay every month. The relationship between the premium and the extent of the cover of your life insurance policy is usually straightforward. This means that a policy for £100,000 will be twice as cheap as a policy that insures you for £200,000.

Policy Type

You can pay higher or cheaper premiums based on the type of your policy. There are many different covers available for you to take out. Each of them gives you a different level of protection and comes with a different price tag.

For example, joint life insurance policies tend to have higher premiums than others. In this case, beneficiaries receive their payout whenever the first partner in a couple passes away. The risk of a claim is higher, hence the higher costs. However, the cost is also shared between the partners, which makes a joint cover a financially viable option.

When it comes to whole life insurance policies, they often come with a guaranteed premium amount set for a specific time (typically, it’s 10 years). After that, your premiums are reviewed and can potentially increase.

On the other hand, fixed-term life insurance policies are known to have cheaper premiums than, for example, whole of life cover. That’s because your insurer is given a set amount of time, such as 25 years (hence the name fixed-term). In the case of whole of life policies, they are required to provide your beneficiaries with a payout in the event of your death whenever it happens – which can take longer than any period of time specified in a fixed-term policy.

With so many options available, you need to think about your needs. Maybe you’d benefit more from not one but two life insurance policies? Don’t make your decision based only on your monthly premiums. Think about the type and level of cover certain life insurance policies can give you, and choose the best option for you and your loved ones.

Premium Type

Life insurance premiums can also be divided into two different types:

  1. A guaranteed premium – this type of premium means that the cost remains fixed throughout the policy.
  2. A reviewable premium – the cost is reviewed by the insurer at regular intervals and can be increased.

Guaranteed premiums may help you plan your budget accordingly because you’re aware of the amount you have to pay every month. They also give you a clear answer regarding the cost of your life insurance.

On the other hand, reviewable premiums tend to be cheaper at the start of your life insurance policy. However, they can end up being more expensive in the long run.

Optional Extras

You can opt for a simple life insurance policy and call it a day. However, you might want to purchase extra features to increase your cover. These extras often come with additional costs.

For example, you might consider getting critical illness cover, which will give you a lump sum in the event of contracting a serious illness within the terms of the cover. You may also want to add your child to your policy (children’s cover).

Additionally, your premiums will be higher if you choose income protection insurance and other payment protection insurance options. These are not obligatory, so you can expect to pay extra money for such features.

Summing Up

As you can see, many factors contribute to the final answer regarding how life insurance premium is calculated. There are personal circumstances, such as the amount of your life insurance premiums affected by a number of policy-related factors, such as the length and extent of the cover you want, your policy type, and additional features you may want to add to it.

With no standard formula to calculate premiums, you need to remember that you must take care of factors you can control if you want to qualify for life insurance and have lower premiums. These include your lifestyle and various policy-related aspects that depend on your needs.

Why Use Insurance Hero?

Insurance Hero cooperates with reputable insurers who can offer you great deals at competitive prices. Contact us today and let us help you find the best life insurance policy tailored to your needs.