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# How Are Life Insurance Premiums Calculated?

### Project Description

When it comes time to buy life insurance, it can seem as though the cost is completely outside of your control. Most companies will have a range of insurance options; term insurance, whole of life, or a hybrid of the two. They will also offer additional options which can increase the cost and benefits of your plan. Lastly, the insurance provider looks through an assortment of your personal details, from which they are able to determine the cost per unit of coverage (for example, the monthly premium cost per \$10,000 of death benefit).

In most cases people find their insurance products guided by their personal requirements. After selecting an appropriate plan, it then seems as though the rest is out of your hands as the insurance company will tell you how much it will cost, at which point you can either take it or leave it. Suffice to say, there is no magic to insurance, only math. Accordingly, it would be useful to at least understand where the cost of insurance premiums come from, and what sort of factors the insurance companies take into consideration to calculate this cost.

## How Is Insurance Cost Calculated?

### Age

Without a doubt the single most influential factor in determining the cost of your insurance is the age at which you take out a policy. Since statistical methodologies were discovered centuries ago in western Europe, insurance companies and governments alike have been able to estimate with increasing accuracy the percentage chance of a random person dying in any given year based on their age. These probabilities broken down by age are known as actuarial tables. Of course, it is impossible to predict the fate of a single individual, but if you were to zoom out and look at the average fate of even just one thousand people, with the right statistics you could make very accurate predictions about how many make it to next year’s Christmas. Outside of academia, the best statisticians in the world often work for insurance companies. Zoom the previous example out even further to one hundred thousand, or even one million individuals, and the statisticians can predict with almost no significant quantifiable error the average mortality rate. From this the results are simple: the older you are, the more likely you are to die. This is the reason why it is always cheaper to buy insurance when you are younger whereby can lock in a low long-term rate.

### Gender

Similar in gravity to your age is your gender. The differences vary slightly depending on ethnicity, but women on average live about 8 years longer than men. This is not an insignificant number, and the insurance actuaries know this. The reasons for men living shorter lives can also vary. For instance, men tend to contract critical illnesses like heart disease with greater frequency and at younger ages. They also tend to work more dangerous and physically demanding jobs, with men accounting for 93% of all workplace deaths. Also, if you happen to find yourself in a burning building, sinking ship, or hostage situation, women and children tend to get saved first. This may seem extreme, but a good rule of thumb is: if something can be calculated, an insurance actuary has probably at some point calculated it. For these reasons, women can buy insurance at significant discounts.

### Height and Weight

Although BMI (‘Body Mass Index’, or the ratio of your weight to height) is becoming a less reliable of a benchmark for overall health, an insurance company will notice if the details on an application classify someone as overweight or obese according to the BMI scale. This does not necessarily mean you will be denied coverage or pay extra, but this would likely trigger follow-up medical examinations (such as cholesterol or blood sugar tests) if they were not already part of your application.

### Medical History

The insurance company will want to have an idea of your personal medical history, as well as your family’s medical history. They typically want to confirm that you have not yet contracted any serious medical conditions, or simply confirm the current status of any previously diagnosed conditions. Chronic medical conditions such as cancer, heart disease, or diabetes are considered to be genetically heritable traits, meaning that if you have a family history of a particular condition, there is a greater likelihood that you will experience similar issues. When reviewing your family medical history, they typically want to confirm if there is any history of medical conditions at a young age (ie. Before age 60 or 65). Again, this will not necessarily render you ineligible for insurance, it could increase the price, or they could institute an exclusion for death related to a specific condition.

### Occupation

Although this is usually not an issue for foreign working professionals in Tokyo and throughout Japan, the actuaries will want to know what type of work you engage in. For instance, if a typical work day for you consists of going to and from an office, yours is not what would be considered a dangerous occupation. If instead you spend your days fishing for king crab in the rough Arctic ocean, or are perhaps are a skydiving instructor, then you are unlikely to ever experience a normally priced insurance policy. Also, in some cases where an applicant is regularly involved in dangerous activities, the company is likely to write in an exclusion for deaths resulting from those specific activities. Pilots, for example, usually see their regular life insurance exempt from deaths due to airplane crashes. However, through their employer they will often have a separate “pilot’s insurance” that only covers death from plane crashes, to act as supplemental insurance in addition to their basic cover.

### Tobacco and Alcohol

For the cost-sensitive insurance applicant, one great deterrent from choosing whether to give up smoking or not is this: tobacco users are a much greater risk to an insurance company, and thereby pay anywhere from 30% to 50% higher premiums for their life insurance. A typical insurance application will also likely inquire as to your weekly alcohol consumption. Similar to height and weight, this usually is not a factor which could lead to the denial of your insurance, but high alcohol consumption could trigger further clarifying questions and medical testing.

### Hobbies

Similar to checking in on your occupation, the insurance actuaries will want to confirm that you do not regularly engage in dangerous hobbies, such as hang-gliding, skydiving, or shark diving. One good example that is likely applicable to many Japan residents is downhill skiing and snowboarding. In most cases, normal snow-skiing is not itself considered to be a dangerous activity by the insurance companies; provided you are skiing at a commercial ski resort and staying “in bounds”. Back country skiing, tree trails, and out of bounds skiing however seems to be growing in popularity among many foreigners in Japan. It is worth noting, and it is strongly advisable to notify any of your friends that engage in these hobbies, that the moment you cross over the “out of bounds” line at the ski resort, it is very likely that any and all insurance policies will become null and void.

Whese are the primary factors to keep in mind when planning to buy insurance, and when filling out your insurance application. It should not be an intimidating process, as everyone is likely to have one or two risk factors associated with their specific situation. No one is of absolutely perfect health condition. In most cases, a reasonably healthy and average working professional in Japan will find their application being approved at the original insurance quote rates. All you need to consider is how much insurance you need.

[ Sources ]

– Landsman, Zinoviy, and Michael Sherris. “Risk measures and insurance premium principles.” Insurance: Mathematics and Economics 29.1 (2001): 103-115.

– Aase, Knut K., and Svein-Arne Persson. “Pricing of unit-linked life insurance policies.” Scandinavian Actuarial Journal 1994.1 (1994): 26-52.

– Dickson, David CM, et al. Actuarial mathematics for life contingent risks. Cambridge University Press, 2013.