Understanding Mortality Charges

When you pare things down to the bare essentials, life insurance is about how much you have to pay to insure your loved ones. The insurance company determines your rate as follows:

1. The insurance company and the industry at-large keep statistics on the mortality rates throughout the country, based on its own research or by relying on research done by others, such as the National Association of Insurance Commissioners. Through this research, the insurance company knows how many men and women in various age ranges (for example, 25- to 29-year-olds, 30- to 34-year-olds, 35- to 39-year-olds, and so on) die each year.
2. The insurance company uses these numbers and some others to determine your life expectancy.
3. The insurance company then calculates how much money it has to earn on your premiums so that when it pays your survivors, it pays less than what it has made. Does that mean that if you have a $50,000 death benefit you will have paid more than $50,000? No. Definitely not. In fact, chances are with a term policy you’ll have paid no more than half to two-thirds of that figure, depending on your age when you die. Keep in mind that the insurance company makes money on the premiums you pay. Many other policyholders continue to pay premiums, and the company uses these premiums to pay out death benefits. Many people pay premiums for years but stop their insurance before they die, and the company gets to keep all that money.
4. The insurance company builds in the commission it pays the agent who sold you the policy.
5. The insurance company adds in the other costs of doing business, such as overhead, administrative costs, salaries, employee benefits, and a profit. Even mail-order or online policies involve some costs of doing business.
6. The insurance company totals all these numbers, which is the mortality charge. Your agent, if you use one, should be able to tell you the exact amount you’re being charged as a mortality charge. This amount increases with age because it’s based on your life expectancy.