When you apply for life insurance, an underwriter performs a risk assessment on you, with the result being your level of insurability. People who are low risk are more insurable than those of high risk and, thus, can gain cheaper premiums and higher valued policies. The higher the risk, the higher the premium, with the riskiest investments being completely uninsurable.
A variety of different issues factor into risk assessment.
- Current health – A person in good health is much more likely to remain in good health than someone who is already suffering from a serious condition. Chronic conditions such as diabetes and asthma, mental health issues and other issues can negatively impact an application
- Medical history – Even if you are doing well now, a history of serious illness such as a heart attack of stroke raises the risk of an individual
- Unhealthy lifestyle choices such as smoking and drug use, both past and present
- Family medical history
- Driving record, as reckless driving considerably elevates risk
- Dangerous occupations
- Dangerous hobbies such as skydiving
Non-Medical Life Insurance
Many of these negative factors are health related, which leads some people to seek out no-medical life insurance policies. These do not include medical exams (unlike most life insurance policies), although they might include a health questionnaire. They policies are considerably more expensive than regular policies, so they should be pursued with caution.
For those who are otherwise uninsurable, there is guaranteed life insurance, which will accept absolutely anyone regardless of insurability. This can be a very expensive option, however, and it often only partially pays out in the first two years.
Term Life vs. Permanent Life Insurance
One way of mitigating the question of insurability is to purchase permanent life insurance. This means you can purchase the policy now, while you are young and healthy, and it will continue to cover you throughout your life so long as you continue paying your premiums.
Term life, on the other hand, only provides coverage for a certain period of time. After that time, the policy expires, and you will need to buy new insurance, generally at a much higher rate because of age. However, term life is generally cheaper than permanent insurance because the risk of you dying within the covered term is much less.
How to Mitigate Risk and Lower Costs
A healthy lifestyle is one of the most important things you can do to be highly insurable and, thus, qualify for lower premiums. Cooperating with the doctor at your medical exam can help you fully discuss your history and lifestyle. Purchasing a policy while young also has considerable short term benefits via lower premiums, although there is a much greater change of paying premiums over a long period of time.
While life insurance is important, it is not the right option for everyone. Your level of insurability greatly affects your premiums and policy value. In many cases, higher risk applicants still benefit from life insurance, but there is a point where saving premium payments is a sounder financial decision.