How life insurance premiums are worked out

There is no fixed price for life insurance. Premiums are based on your age, health and lifestyle, along with how much cover you want, how long you want it to run and what kind of policy you choose¹. To give a sense of the spread, one analysis of job-based pricing found cover could cost as little as £4.68 per month, or as much as £34². Two people the same age can therefore be quoted very different amounts for the same sum insured, and the same person can be quoted very different amounts by different insurers.

The price is set when you apply, through a process called underwriting, and the terms you are offered can depend on the insurer's own appetite for the particular risk you present³. After that, how the premium behaves over the years depends on one big choice made at the outset: whether the premiums are guaranteed or reviewable. Guaranteed premiums are fixed for the whole term. Reviewable premiums start lower but the insurer has the right to increase them at periodic reviews, typically every five years.

What an insurer looks at when pricing your cover

When an insurer calculates a premium, it considers a variety of factors, and the result varies depending on the insurer, the individual circumstances of the policyholder and the particular risks the insurer is being asked to cover³. Life insurance is most often underwritten on your personal circumstances rather than on averages, which is why applications ask detailed questions about your health, family medical history, occupation and habits⁸.

The factors insurers weigh are broadly consistent across the market. Post Office states its life insurance premiums are calculated based on your age, health, smoker status, occupation, lifestyle and the amount of cover you want⁹. Legal & General lists the health and lifestyle factors that affect the price as your age, your health history including family medical history, your alcohol usage and smoker status including vaping, your weight (Body Mass Index), and any risks linked to your occupation or hobbies¹⁰. Which? adds the shape of the policy itself to the list: the coverage amount, the policy type, the term length and any optional extras all feed into the price¹¹.

The amount you apply for matters in another way too. Even if the total you are applying for is reasonable for your circumstances, each insurer will have a maximum amount it is prepared to risk per customer with your risk profile, so very large sums may need to be split across more than one insurer¹². For joint policies, the assessment covers both lives: insurers look at age, health and medical history, smoking or vaping, the amount of cover, occupation, the length of the policy, the type of joint policy and any optional extras¹³.

In practice, this means the quote you see on a comparison site or from a broker is provisional until the insurer has underwritten the application. Answering the questions fully and honestly matters, because the premium the insurer finally offers reflects what the answers show, and a claim can be affected if material information was left out. The guide to applying for cover explains the medical questions and underwriting process in detail, and answering an insurer's questions honestly covers what happens if information is missed.

Your age, health and lifestyle

Age is the most consistent driver of price: the older you are, the more expensive life insurance becomes¹. Standard life insurance is priced on your age, your health and your lifestyle, including smoking, drinking and dangerous activities¹⁴, and Santander lists the cost factors as how old you are, your overall health, what your lifestyle looks like and how much cover you need¹⁵.

Health conditions push premiums up where they increase the risk of dying early¹. Insurers may consider someone with a pre-existing condition high risk, which could mean a more expensive premium and possibly a medical examination before cover is granted¹⁶. For people who have or have had cancer, if cover is available at all it is likely to cost more than the average monthly premium¹⁷. Once a policy is in place, however, the premiums cannot be increased because of a later cancer diagnosis¹⁸.

Smoking and nicotine use are treated firmly. Life insurance premiums are generally more expensive for smokers¹⁹, and insurers weight premiums for people who use vapes, gum and patches the same as for those who smoke cigarettes¹⁸. Lifestyle choices such as high alcohol consumption, dangerous sports and motorcycling can also push premiums up¹. Occupation matters as well: one analysis of job titles found the same person's quote ranged from £4.68 to £34 a month depending on the job declared².

Age changes the price sharply, and real quotes show how. In a comparison of £300,000 of life insurance plus £75,000 of critical illness cover over 20 years, a 30-year-old non-smoker was quoted £22.48 a month by Vitality, while 50-year-olds were quoted £103.69 by Vitality, £127.45 by LV and £155.23 by Legal & General for the same cover²⁰. The guide to getting cover with a pre-existing medical condition covers the options when health is an issue, and how much life insurance cover you need helps with the other side of the price equation: the sum insured.

Guaranteed or reviewable premiums: how each one behaves

Most life insurance offers a choice between two premium structures. Post Office explains that you will be offered either guaranteed or reviewable premiums, depending on which policy you choose²¹. The choice determines what happens to the price for the next decade or more, so it is worth understanding before signing up.

With guaranteed premiums, the amount you pay for your cover is fixed until the end of your policy²¹. With reviewable premiums, the insurer periodically assesses and adjusts your premiums based on risk and economic factors, such as interest rates or advances in medical treatment²¹. Family income benefit policies offer the same choice: guaranteed premiums fixed for the whole term, or reviewable premiums that cost less initially but may be increased on regular review²². Critical illness cover works the same way, with guaranteed premiums costing more to start with and reviewable premiums reviewed usually every five years and likely to go up over time²³. Whole life cover can also be written on either basis, and Cavendish Online suggests discussing your preference with an adviser first²⁴.

The trade-off is simple. Guaranteed premiums buy certainty and pay for it upfront. Reviewable premiums start cheaper but hand the insurer a right to raise the price later, based on its financial position and its expectation of paying future claims⁴. Neither is inherently better: the right choice depends on whether a household would rather budget for a known higher cost now or accept the risk of increases later. The comparison page on guaranteed or reviewable premiums sets the two side by side.

Reviewable premiums can rise at each review, typically every five years

A reviewable premium is not a promise to hold the price. The insurer has the right to periodically review the premium and may increase it, based on its financial position and its expectation of paying future claims⁴. Your monthly premiums will start out at a lower level than the guaranteed equivalent⁴, but the structure only holds until the first review.

The review interval is set out in the policy terms, and five years is the most common pattern. Legal & General's terms state that with reviewable premiums it checks your amount of cover every five years, starting from the fifth anniversary of your policy start date⁵. MetLife's EverydayProtect terms allow the premium to be increased or decreased no more than once every five years²⁵. Canada Life's Flexible Life Plan fixes premiums for the first ten years, then reviews the cost of life cover every five years, with the premium very likely to increase²⁶. Some whole of life policies are reviewed after a set time, usually 10 years¹⁷. Pre-funded care plans, a related product, are usually reviewed every 5 years to make sure the premiums are enough to maintain the cover.

Two features soften the edges. First, small changes may not be made at all: on Legal & General's terms, if the review works out that the premium should change by less than 5%, no change is made⁵. Second, the premium is often guaranteed for the first few years, often the first five or 10, before the first repricing²⁷. But the direction of travel over a long policy is upwards: some reviewable policies start with low premiums that rise at each review, and if you do not accept an increase, your cover will fall²⁸. That last point is the one to weigh most carefully, because declining an increase does not leave things as they are, it reduces the payout your family would receive.

Guaranteed premiums are fixed for the whole term

A guaranteed premium does what the name says. With a guaranteed premium, the price you pay each month for your cover is set in stone for the entire term of the policy⁴. Cavendish Online puts it the same way: when you select a life insurance policy with guaranteed premiums, the monthly cost is fixed and will never increase¹⁹. For most term life insurance policies, premiums are fixed for the duration of the term²⁹.

The certainty is what you pay for. Guaranteed premiums usually cost more to start with than reviewable ones²³, because the insurer is pricing every risk it can foresee across the whole term, at today's rates, with no right to revisit. In exchange, the premium ignores later changes in the insurer's claims experience, interest rates and medical cost assumptions. Whole life insurance premiums are typically fixed and do not increase with age once the policy is in force²⁴.

For a sense of what fixed cover costs, Which? found a 53-year-old non-smoker in reasonable health paying £7 a month for standard life insurance, a £10,000 term policy running until age 90¹⁴. Larger sums cost proportionally more, as the quotes in the age section above show. The fixed price also means the real value of a level payout falls to inflation over a long term, which is what indexation, covered below, exists to address. If certainty of outlay matters more to a household than the lowest possible starting price, guaranteed premiums tend to suit; if the starting price is the constraint, reviewable premiums cost less now but carry the risk of increases later.

Indexation: cover and premiums that rise with inflation

Indexation is an add-on that links both the cover amount and the premium to inflation. Increasing life insurance is a policy that increases over time, usually linked to inflation so the sum assured rises to reflect it⁷. Usually this is achieved by including indexation as an add-on to a level term life insurance policy²⁹. You can set the cover to increase by a set amount each year or by the retail prices index (RPI) measure of inflation⁴.

The mechanics are consistent across providers, with variations in the index used. Vitality states that indexation changes your premium and your cover amount each year in line with the Retail Prices Index (RPI), with the amount rounded up to the nearest 0.25%⁶. Aviva notes that some policies use RPI and others use the Consumer Price Index (CPI)³⁰. Zurich describes increasing cover as going up every year on the anniversary of the policy by a pre-agreed amount, designed to protect against inflation and increasing living costs³¹. Post Office's increasing cover ties the benefit amount to the Retail Price Index, up to a maximum annual increase of 10%⁹.

The cost side is the part to plan for. With whole life insurance written on an increasing basis, the sum assured increases with inflation over time, but the premiums will too²⁴. Aviva is blunter still: along with the increase in cover, the amount you pay in premiums will also usually increase, and prices generally increase at a higher rate than the cover amount³⁰. The starting premium, though, is usually unaffected: applying indexation generally does not change the starting premium of the policy, though some insurers may apply a slight increase, especially for income protection⁷, and increasing term insurance starts at the same price as level term cover⁴.

Indexation is decided when the policy is taken out. It is added at the application stage and it is usually not possible to add it to an existing policy⁷. The narrow guide to indexation on life insurance and the comparison of level or increasing cover cover the choice in more depth.

Increases under indexation are capped at 10% a year

The increases are not open-ended. Vitality states that indexation increases will never amount to more than 10% a year⁶. Legal & General's Increasing Life Insurance works the same way: the amount of cover increases in line with changes in the Retail Prices Index each year, up to a maximum of 10%³². Post Office's increasing cover carries the same 10% maximum annual increase⁹.

A worked example shows the effect on the cover amount. Aviva gives the case of a policy with a cover amount of £100,000: with a 3% per year indexation rate, the cover would increase to £103,000 in the first year³⁰. On the premium side, Legal & General's Increasing Life Insurance terms state that with reviewable premiums the premiums increase in line with changes in the RPI multiplied by 1.5, subject to a maximum increase of 15% per annum³².

Two practical points are worth knowing. First, because premiums generally rise faster than the cover amount³⁰, a household on a tight budget should expect the annual indexation increase to be felt, even in low-inflation years. Second, indexation increases are not health-related: once a policy is in place, the premiums cannot be increased because of a cancer diagnosis¹⁸, but indexation increases you agreed to at the outset are contractual and continue regardless. If an increase becomes unaffordable, the options depend on the insurer's terms, and the pages on changing your cover and missed premiums and lapsed cover explain what can happen next.

How premiums are paid

Life insurance is usually paid monthly. You pay a set amount every month for the insurance during the policy's term²⁷. More generally, an insurance premium can be paid as a one-off payment, or in monthly or annual instalments, depending on the type of insurance and the term of the policy³³.

How long the payments last depends on the type of policy. With whole-of-life cover you typically continue paying premiums until the end of the term or until you are 90¹¹. Over 50s plans are stricter: you must pay the premium until you die, and if you stop paying, the entire policy is cancelled and you get nothing back¹⁴. That is a materially different commitment from a term policy, where the payments end when the term ends, and it is one reason over 50s plans need careful thought, since they often pay out less than has been paid in¹⁴.

One tax point sits behind premiums paid on behalf of someone else. HMRC treats premiums paid by you on a policy as a lifetime gift, usually covered by the annual £3,000 exemption or the "gifts out of normal income" exemption³⁴. This usually arises when premiums are paid on a policy written in trust or on someone else's life, and the guide to writing life insurance in trust and the narrow page on life insurance and inheritance tax cover the detail.

If paying becomes difficult, the worst response is simply stopping the direct debit, especially on a whole of life or over 50s plan where that can end the policy with nothing back. The page on missed premiums and lapsed cover explains the options before that point.

Where to get help with pricing or premium disputes

If you think a premium has been calculated wrongly, increased unfairly, or a claim or complaint handled badly, there is a free route to an independent decision. The Financial Ombudsman Service can look at complaints about insurance pricing and renewals, and it explains that the premium for a policy can vary depending on the insurer, the individual circumstances of the policyholder and the particular risks being covered³. Complain to the insurer first, giving it the chance to respond, and the ombudsman can then review the matter.

For help understanding a quote or a policy's terms before buying, MoneyHelper, the government-backed money guidance service, offers free information on protection insurance, and the guide to buying protection insurance explains the roles of advisers, brokers and going direct. For people managing a diagnosis, Macmillan and other charities publish guidance on insurance and cancer, including how premiums are affected¹⁷.

The main pages on life insurance, term life insurance and whole of life insurance cover the products themselves, and is my life insurance protected if the insurer fails? explains what happens to cover if the insurer runs into trouble.