Generally, life insurance companies will base their payout on the "face value" of the policy. This is the amount of money that the policyholder (or their beneficiaries) will receive upon the policyholder's death. The face value is determined by the policyholder when they first purchase the policy and is generally based on how much money the policyholder wants their beneficiaries to receive.
There are a few different factors that life insurance companies will consider when determining the face value of a policy, such as the policyholder's age, health, occupation, and lifestyle. The face value will also typically increase over time as the policyholder ages and their life expectancy decreases.
It's important to note that the face value is not necessarily the same as the death benefit. The death benefit is the actual amount of money that the policyholder's beneficiaries will receive upon the policyholder's death. The death benefit will generally be equal to or less than the face value, depending on the terms of the policy.
There are a few different ways that life insurance companies can calculate the death benefit, such as using a fixed rate, a variable rate, or a formula. The most common way that death benefits are calculated is by using a formula that takes into account the policyholder's age, health, and lifestyle.
Generally, the older the policyholder is, the higher the death benefit will be. This is because the policyholder's life expectancy is shorter and the life insurance company wants to make sure that the beneficiaries will receive the money that they are owed.
The policyholder's health is also a major factor that life insurance companies will consider when calculating the death benefit. If the policyholder is in good health, they will likely receive a higher death benefit than someone who is in poor health. This is because the policyholder is less likely to die prematurely, and the life insurance company wants to make sure that the beneficiaries will receive the money that they are owed.
The policyholder's occupation and lifestyle can also affect the death benefit. For example, someone who is a smoker or who has a dangerous job will likely receive a lower death benefit than someone who doesn't smoke and has a safe job. This is because the policyholder is more likely to die prematurely, and the life insurance company wants to make sure that the beneficiaries will receive the money that they are owed.