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:

  • Age
  • Area of residence
  • Nature of employment
  • Medical ailments and history
  • Smoking and other lifestyle habits
  • Likelihood of claims being made by the person insured
  • Income
  • Height and Weight
  • Marital status and dependents
  • Gender
  • Hobbies with high risks
  • Global travel history
  • Debts

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.


People like you also read...