How The Cost of Life Insurance is Calculated

The cost of Life Insurance varies from company to company. This article explains the basics of how the cost of Life Insurance is calculated by a Life Insurance company.

Each Insurance company will have a team of mathematicians (known as Actuaries) whose role includes the calculation of the premiums to be charged for an insurance policy. The same basic principles apply for all forms of insurance.

The basics of calculating a Life Insurance premium

The first thing that the Actuary will decide when calculating the cost of any insurance policy is the likelihood of a claim. The main factors for Life Insurance include:-

  • Age
  • Gender (until December 2012)
  • Whether a smoker
  • Term of policy
  • Health of the person to be insured


A typical example is that a person in their 20s at the time of application is less likely to die than a person in their 40s during the next 10 years of their life, so the cost of Life Insurance for the younger person is less than the older person.


Statistically a female is likely to live for about five years longer than a male, so at present (until December 2012) premiums for a female are often lower than for a male. EU law will change this so that the same premium is charged to both males and females.

Whether a smoker

Statistically a non smoker will live longer than a person who is a smoker. Therefore smokers are usually charged higher premiums than non smokers.

Term of policy

The shorter the term of a policy, the less likely an insured person is to die. For instance a person in their 30s is less likely to die in the next five years than in the next twenty five years. So the shorter the term, the lower the premium will be.

Health of the person

A person who has a history of heart problems is more likely to die in the term of an insurance policy than a person who has not. Where there is a medical history that makes the person statistically more likely to die, the Life Insurance company may charge a higher premium, or in some cases exclude cover for the person dying from specific conditions. In the most serious cases cover may be refused.

Cost of pooling the risk

All insurance companies (whatever type of insurance) will spread their risk. Usually they will take a certain amount of the risk themselves, and then pay a premium to another company for them to take on part or all of the remainder of the risk. This pooling of risk (known as reinsurance) reduces the likelihood of an insurance company being unable to pay claims.

Example premium calculation

This very simplistic example (not based on any actual policy) shows how the monthly premium of a Life Insurance policy is calculated.

Amount of cover Premium cost
Risk taken by Insurance company £50,000 £10.00
Risk passed to Reinsurance company £200,000 £39.00
Insurance company administration costs   £1.00
Total £250,000 £50.00

This article is for guidance only and must not be construed as advice. The contents of this article are aimed at the UK market, although many countries will have similar policies available. If you need advice you should refer to a Financial Adviser.

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