Okay, so you’ve read Part 1, and now you are ready to build on some simple concepts. This post will deal with how premiums rise as you get older. Once we understand this, we will have a lot of the groundwork covered for the next parts in this series.

Remember how the statistics for a 40 year old man, way back when, indicated that he had a 5 in 100 chance of dying in the next month?  Well let’s fast forward a little bit.  Let’s say now that a 40 year old man (due to improvements in healthcare and quality of life) now has a 5 in 100 chance of dying within the next YEAR.  As you know, your chances of dying go up with age.  So statistically a 41 year old man should have a slightly higher "mortality" rate than the 40 year old, and 39 year old would have a slightly LOWER mortality rate than the 40 year old.

BUT let’s take a closer look.  Maybe the 39 year old has a 4 in 100 chance of dying (4%) vs the 40 year old’s 5 in 100 chance (5%). The 41 year old would have a 7 in 100 chance (7%). In this case, the AMOUNT OF CHANGE between the 39 year old and the 40 year old’s chance of dying is less than the AMOUNT OF CHANGE between the 40 year old and the 41 year old’s chance of dying.  Another way to explain this is that, all else being equal, you would expect that it is very probable that an average-health 25 year old has little chance of dying in the next year.  On the other hand, the average-health 99 year old has a pretty good chance of dying in the next year.  As you get older, your chances of dying increase exponentially.  For the 99 year old, he might have a 95 in 100 chance.

The general trend of mortality can be directly translated into insurance premiums.  If the chances of you dying are greater, than your premium will be greater. So on the graph below, you can consider the Y axis as either mortality OR insurance premium amount: 

Click here to go to Part 3: How Term Life is Priced. 

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