Insurance companies assume a financial risk for an insured person in return for a payment. The amount of the payment is calculated based on the probabliity of loss. In some cases, certain causes of loss may be excluded in the policy. For instance, since floods are catastrophic occurrences that cannot be predicted, homeowner policies exclude floods as a cause of loss and do not pay for damages caused by floods. Calculating life insurance rates in high risk areas is a similar process.
Excluding Causes of Death
While most people believe that suicide is excluded by life insurance policies, most suicide clauses expire after two years. In areas where a terminal disease, like cancer, is especially prevalent, the insurer may exclude death arising from that disease in the policy. This means that if a person dies of that particular disease, the company may refund the premiums (or not), but they will not pay the death benefit if the insured person dies from the excluded cause.
Calculating Mortality Rates
Some areas of the United States have shorter life expectancies than others. In areas where life expectancies are shorter, life insurance rates are higher to compensate for the increased number of death benefit claims and the shorter periods over which premiums are paid. Rates for whole life insurance are based on the age of the insured person at the time the policy is purchased and his or her life expectancy. Term life insurance rates are calculated based on the insured person’s age and mortality risk over the policy term.
Sharing the Risk
Life insurance is based on spreading a risk over a large number of people. In the case of life insurance, younger policyholders help pay the cost of death benefits for older policyholders. The higher the risk of a claim to the insurance company, the higher the cost of the premiums to a person. In West Virginia where a large number of residents are engaged in coal mining, a high risk occupation, companies may exclude death by occupational respiratory diseases or mine collapse to limit their risks and keep rates for others lower.
Life Insurance Is a Business
Life insurance companies are businesses which are expected to make a profit. State and federal regulations permit the companies to set rates based on mortality risks in a particular area so they can cover claims to individuals and stay financially viable. Some life insurers may refuse to write policies in a high risk area unless they are compelled to do so by state regulations. The state and federal governments recognize the right of any business to operate at a profit and account for this in rate regulations.
A High Risk Area can Raise Rates Over a Larger Area
By setting life insurance rates based on the mortality risks in a particular area, life insurance companies attempt to be fair to individual insured people. In some cases, regulations may require them to keep rates for a high risk area lower while raising rates for other areas to compensate for the additional anticipated costs for the high risk area. If life insurance companies cannot maintain their profits at a reasonable level, they will not sell life insurance in some areas of the country, leaving families unprotected.
Life insurance rates are calculated based on the number of claims which can be expected in a particular area and a specific age group. If the number of claims in an area is expected to be higher than the national average, rates will higher than average in that area.