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An insurance premium equates to the money that is paid by any person or company/business for availing of an insurance policy. The insurance premium amount is influenced by multiple factors and varies from one payee to another.
What is Insurance Premium?
The insurance company stipulates that an individual or business periodically pay them a specific amount of money as premium for the availing and maintenance of their insurance policy and coverage. Insurance companies consider many factors while determining the premiums, particularly in case of life insurance. These include the chances of claims being made by the policyholder, medical conditions, smoking and other lifestyle habits, area of residence, nature of employment and so on.
There are actuaries tapped by insurers for working out the chances of claims being made by the insured individual for critical ailments or life-threatening diseases like cancer/heart attacks across multiple age groups. The higher the risks linked to the individual, the higher will be the premium for life insurance. Premiums can be paid through monthly, half-yearly or even annual installments. Customers can also pay the entire amount as a one-time payment for the whole policy term prior to the commencement of coverage in some cases.
The insurance premium is what insurance companies make use of when it comes to ensuring coverage for all liabilities linked to the policy. The premium may also be invested by the insurance company in securities for earning returns and covering some of the costs tied to the coverage.
How is the Insurance Premium calculated?
While you can always look for a good insurance premium calculator to work out the premiums, the calculation procedure also depends on several factors as listed below:
1. Age
2. Area of residence
3. Nature of employment
4. Medical ailments and history
5. Smoking and other lifestyle habits
6. Likelihood of claims being made by the person insured
7. Income
8. Height and weight
9. Marital status and dependents
10. Gender
11. Hobbies with high risks
12. Global travel history
13. Debts
Age is one of the first things that can impact life insurance premiums for a policy. Younger individuals usually pay lower premiums as they are considered lower risk. Older people can be charged a higher premium due to increased health risks and lower life expectancy.
The city or state of your residence can impact the cost of your premium. Some areas may be prone to natural disasters, increasing the likelihood of an unfortunate incident. Similarly, insurers may also see areas with a high crime rate as high risk. If you live in such places, you might have to pay a higher premium.
Your profession influences the monthly life insurance cost. Riskier professionals, such as construction workers, mining workers, pilots, police officers, military personnel and more, usually pay higher premiums due to higher chances of accidents in their jobs.
A medical history of illnesses or suffering from health concerns at the time of purchasing the policy puts you in a higher risk zone for the insurer. In such a case, you are charged higher life insurance premiums.
Smokers, drinkers and individuals with similar lifestyle habits usually pay more insurance premiums due to increased health risks. These habits significantly impact your health and play a crucial role in deciding the premium for your policy.
If you have a history of making claims, your premium might be higher as the insurance company may anticipate future claims.
While your income may not affect the premium directly, it can indirectly impact the monthly life insurance cost. If you fall into a higher income group, you will likely buy higher coverage. A high sum assured can increase the premium of the plan.
Your height and weight are used to calculate your Body Mass Index (BMI). The BMI is an indicator of your health and helps the insurance company understand the risk you bring to the table. You can be prone to illnesses if your weight is not proportional to your height. To cover this risk, you may be charged a higher premium.
Your marital status and the number of dependents you have significantly influence your life insurance coverage. Insurance companies might tailor policies to offer you a lower premium and a relatively lower sum assured if you have numerous dependents.
Women and men may be charged different life insurance premiums. Women are at a lower risk of suffering from some illnesses than men, such as heart attack, cardiovascular disease and more1. Insurers are more likely to charge women a lower premium than men.
If you have dangerous hobbies, like skydiving, deep sea diving, paragliding and others, your premiums can be increased due to the higher likelihood of accidents.
If you extensively travel to high-risk areas, including war zones and areas with a high rate of diseases and poor hygiene, the premium for your life insurance policy will be high due to increased exposure to various risks.
If you have high debt, you are likely to purchase high coverage. As a result, the premium for your plan will also rise.
Insurance companies also take into account the mortality cost, i.e. the sum assured or the minimum sum payable by the insurance company in the event of death of the policy holder. This is also worked out through assessing the factors mentioned above. The operational costs of insurance companies like the rental of office space, salaries of employees, commissions of agents, etc. also determine insurance premiums. Lastly, the interest earned on invested premiums is also taken into account before the premium calculation.
As can be seen, premium calculation is a multi-layered process, depending on several factors and varying from one person or policy to another. You should always use a calculator to determine the insurance premium payable on your life insurance policy prior to choosing the same or renewing it every year. These calculators are available on the websites of most insurers.
Things to consider when buying an insurance policy
Below are a few things that you must consider when buying an insurance policy:
1. Insurance premium
2. Policy term
The premium should be affordable and fit into your planned budget. Evaluate different premium payment options, such as yearly, half-yearly and monthly and choose the option that aligns with your financial situation
Policy term is the period for which insurance company provides life cover` to the insured. The policy term should be chosen based on your age and the needs of your dependent family members. For example, if you have young children, you might want a policy that provides coverage until they are financially independent
3. Rider
Rider is an optional add-on which provides additional benefit over basic coverage of the policy. Riders can include options like critical illness benefit, accidental death benefit or disability benefit. They can be added to your base policy at an extra cost to enhance protection
4. Long-term goals
Your insurance needs can align with different long-term goals. An endowment plan could be suitable if you are looking for a combination of protection and savings. A Unit-Linked Insurance Plan (ULIP) can be an option if you are interested in investment opportunities. A term insurance policy can be suitable for large life cover` at affordable premiums
5. Claim process
A straightforward and hassle-free claim process is essential for your beneficiary's peace of mind. Research the insurer's reputation for processing claims and select a company with a quick and hassle-free process. This can be gauged by comparing the insurer’s claim settlement ratio
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How do insurers use life insurance premiums?
Life insurance premiums can be used for diverse needs. A part of the premium is set aside for the death claim. In the unfortunate event of your absence, the life insurance company will pay the beneficiary with this money. Another part of the premium is allocated to cover the day-to-day operational costs of the insurance company. This includes administrative expenses, employee salaries and other operating costs.
If you have chosen a life insurance plan with a savings or investment component, a portion of your premium will also be directed towards investments. The insurer will invest this money in the market to generate returns, such as maturity benefits, bonuses, loyalty additions and more.
What happens if you stop paying your life insurance premiums?
The insurer usually provides a grace period to complete the payment. This grace period offers you additional time to pay for missed payments. However, if you fail to make the payment within the stipulated grace period, your policy will lapse. The plan's coverage will end, and you will lose all the benefits associated with the insurance plan.
How to pay life insurance premiums?
You can pay your life insurance premiums using online and offline options. Online payments can be made using debit/credit cards, Unified Payments Interface (UPI) or net banking on the insurer's official website. If you prefer an offline method, you can make cash payments at the insurer's local office or submit a cheque to the nearest branch.
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Check Term Insurance Premium
FAQs
Insurance premium can be considered as an investment. When you pay your insurance premium, you get financial protection against uncertainties. Insurance premiums must be seen as an investment in a financially secured future.
Insurance premiums can be of multiple types. Your insurance premiums can be monthly, quarterly, half-yearly, annual, or single pay, based on the frequency of payment. They can also be fixed or flexible. Fixed insurance premiums remain the same for the entire policy duration. Flexible insurance premiums may change based on the terms and conditions of the plan.
Yes, insurance premium can change depending on any modifications made to your policy. For instance, adding riders can increase the insurance premiums as you would get additional financial protection from your life insurance plan.
Yes, life insurance plans generally provide you with a grace period for paying your premiums. If you are unable to pay your premium on the due date, you may get a grace period of up to 30 days to make the payment, depending on your plan. However, if the payment is not completed within the grace period, the policy may lapse, and all benefits will then be terminated.
You can pay the insurance premium online using your debit card, credit card, net banking, mobile banking or UPI, as per your convenience.
A life insurance policy can be cancelled during the free-look period. This is a window of up to 30 days right after the policy is bought. You can cancel your policy during this period if you are not satisfied or if you change your mind. In this case, you may receive your premium as a refund, subject to some deductions, as per the terms and conditions of your policy.
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Disclaimer
1 Gender differences in coronary heart disease -
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3018605/
` Life cover is the benefit payable on the death of the Life Assured during the policy term.
COMP/DOC/Feb/2024/292/5552
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