What are the three factors that determine the premium for a particular life insurance policy?

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At a certain point, you may consider buying life insurance to protect your family's future.

Insurance-comparison website Policygenius boils it down to a simple question to decide whether you need life insurance: Does anyone rely on your income for their financial well-being? That could be children, a spouse, aging parents, or anyone else who could be considered some level of dependent.

If someone else relies on your income, then you probably need life insurance. Stay-at-home parents, retirees, and children generally don't.

You can think of a life insurance premium — the amount you pay monthly to the insurance company — like a three-legged stool. How much you pay depends on how much coverage you want, the type of policy you get, and how much risk you pose. The average person can expect to pay between $300 to $400 a year for life insurance, according to Policygenius, but it really depends on your situation.

The first step is calculating how much life insurance you need. This amount is called the death benefit and will generally be paid out to your beneficiaries in a tax-free lump sum. Typically, the higher your income and the more expensive the city you live in, the more money your family will need in your absence.

Next, you'll decide what type of policy you want. In most cases, a limited-time, or term life insurance policy is a good fit for coverage because it's the most affordable option, explains Logan Sachon, insurance editor at Policygenius. Whole life insurance policies are six to 10 times more expensive than term life, Sachon told Business Insider.

Finally, you can start getting quotes. A site like Policygenius can help you compare premiums from different carriers based on the coverage you want, and you can apply as soon as you find one you like.

According to Policygenius, a 30-year-old male with "preferred health" can expect to pay a monthly premium of $23 for a $250,000 30-year term life policy to $73 a month for a $1 million 30-year term life policy. Women pay less, on average, ranging from $19 to $58 a month for the same policies. By comparison, a whole life policy would cost the same 30-year-old male about $122 a month.

The carrier will then evaluate you on a variety of factors to determine your level of risk. This is often the most "rigorous" part of the process, Sachon said. "Each insurance company weighs risk differently, but there are certain factors that they all consider when evaluating your application," she said.

Here are the major factors every carrier considers, according to Sachon:

• Age: Life insurance premiums increase an average of 8% each year you age, regardless of health.
• Nicotine use: "Being a nicotine user is one of the quickest ways to raise your life insurance rates. Smokers can pay two to three times more than nonsmokers," Sachon said. Some carriers also consider marijuana use.
• Weight: Being overweight or underweight can affect your premium.
• Health history: This includes your prescription history and diagnoses.
• Medical exam: Life insurance companies also require — and pay for — a medical exam with blood and/or urine tests.
• Credit history: Credit scores don't affect premiums much, but financial red flags, including bankruptcy, will.
• Driving history: Insurance companies will look over your motor vehicle report, which includes any officially documented violations, to determine risk.
• Occupation: If your job involves high-risk activities, "you could either be charged a higher premium or declined coverage altogether," Sachon said.

While some types of life insurance policies don't require a medical exam for those in good health, Sachon said, "it's almost always a good idea to go through full underwriting and get the medical exam, as it gives you more options for coverage."

Finally the insurer will determine a premium and you can activate your policy with the first payment. Bear in mind that most life insurance policies have a contestability period, according to Policygenius. This two-year period from the day the policy is activated allows the carrier to review information provided during the application process and potentially terminate the policy in cases of fraud.

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

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If the main reason you don’t have a life insurance policy is because you think it’s too expensive, you are in good company. Almost two-thirds of people who do not have a life insurance policy cited this reason, according to the 2020 Insurance Barometer from LIMRA, an industry-funded research company. Sixty-seven percent of respondents said they don’t have life insurance because they have other financial priorities.

But life insurance may be more affordable than you think. LIMRA found that survey respondents overestimate the cost of a policy by more than three times the cost. When asked to estimate the cost of a $250,000 term life policy for a healthy 30-year old, more than half the respondents said $500 or more per year. The actual cost is closer to $160 per year.

Part of the reason many people overestimate the cost of life insurance is because they don’t understand how life insurance companies come up with their rates. Here are some of the most common factors that affect life insurance rates.

Age

Insurance companies look at your current age and life expectancy. Generally, the younger you are, the less you are statistically likely to die, which means lower monthly life insurance premiums. Conversely, the older you are, the more you can expect to pay.

“One of the most noteworthy life insurance underwriting criteria is your age. Not only do insurers use your age to determine your rate, it also dictates how much coverage you’re eligible for,” says Brian Greenberg, CEO and founder of True Blue Life Insurance.

For example, life insurance for seniors can be limited for the length of the level term period. You can generally buy term life insurance through age 80, but the term period available will be shorter. If you’re interested in a cash value life insurance policy, you might find some companies have a maximum age of 85 or younger.

Gender

Life expectancy for females is roughly five years longer than males, according to the National Center for Health Statistics. Since males are likely to have a life insurance death benefit payout sooner than females, this means women generally pay less for life insurance than men.

Currently, Montana is the only state where insurers must provide gender-neutral life insurance rates.

Health

Health has a huge impact on life insurance quotes. Applicants with certain health conditions are considered riskier to insure because they’re more likely to have a life insurance payout sooner. Information about your health is often obtained by an insurer through a life insurance medical exam, by getting your medical records [with your permission] and by accessing prescription drug databases to see what medications you have taken.

Insurance companies will look at health factors, such as:

• Your medical history. This includes past and current health problems, including past and current treatments and prescription medications
• Height and weight. This typically includes your body mass index [BMI], which is a measure of body fat.
• Risky behaviors. This includes smoking, drinking and drug use
• Family medical history. This includes hereditary conditions like heart disease and cancer among your parents and siblings

Some life insurance companies offer no-exam life insurance. You won’t have to take a life insurance medical exam, but in some cases you’ll be charged more for coverage because the insurer has less information about you.

Examples of no-exam life insurance include:

• Instant life insurance. The traditional life insurance application process can take 30 days or more. Some companies have embraced technology for an “accelerated underwriting” process that produces fast life insurance approvals, sometimes within seconds. Typically you need to be young and healthy in order to qualify for instant, no-exam life insurance.
• Simplified issue life insurance. You’ll have to answer a few health and lifestyle questions, but there’s no medical exam for a simplified issue policy. Insurers might use third-party sources to gather some information like prescription drug history and your driving record. Simplified issue life insurance can be twice as expensive as traditional life insurance.
• Guaranteed issue life insurance. Like the name implies, you’re guaranteed for approval, with no health questions. But these tend to be very expensive policies and are generally for people with major health issues who want only a small amount of life insurance for final expenses. If you are in good health, or even have a few health issues, it’s better to avoid guaranteed issue life insurance.

Lifestyle

A typical life insurance application will ask some questions about your lifestyle such as:

• Driving history. Drivers with a history of DUIs, reckless driving convictions or suspended licenses are seen as higher risk.
• Criminal record. A criminal record will impact not only your life insurance quote but also possibly your eligibility. There’s typically a 10-year waiting period after a felony is discharged and a five-year waiting period after a DUI to qualify for an underwritten life insurance policy, says Greenberg.
• Dangerous occupations. If your job includes hazardous duties, you could pay higher rates.
• Dangerous hobbies. Activities like scuba diving, skydiving and piloting a plane are considered risky to insure.
• Financial factors. Insurance companies typically take bankruptcies into account. Many life insurance companies will decline coverage if you’ve filed bankruptcy in the last five years, says Greenberg. In addition, credit is a part of some risk scores that life insurers use.

Type of Life Insurance Policy

Another big factor that will determine the cost of your life insurance is the type of policy you buy and the amount of coverage. Generally speaking, term life insurance is the least expensive, universal life costs more than term life, and whole life insurance is the most expensive.

You can also buy life insurance riders, which are add-ons that help fill coverage gaps. For example, you might buy a “waiver of premium” rider that lets you stop paying if you become disabled while keeping the coverage in-force.

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Life Insurance Rates FAQ

Smokers and nicotine users can buy life insurance policies but will pay more. We found that life insurance for smokers can cost nearly four times as much for a 40-year-old smoker versus a non-smoker for a 20-year, $500,000 term life policy.

Life insurance companies essentially have one burning question: How long are you expected to live [known in the industry as mortality]?

To answer this question, life insurance companies gather intel on you from a variety of sources, including your life insurance application. They’ll often request medical records from your doctor’s office, look at prescription drug history, pull your driving record and use-third party sources like the MIB Group to get additional information.

If you are ready to buy life insurance, a first step is determining how much life insurance you need and what type of policy is right [such as term life or universal life insurance].

Your next step is to get life insurance quotes from multiple insurance companies. Look at cost, coverage features and the company’s financial strength rating.

See Forbes Advisor’s ratings of the best life insurance companies.