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:
- Area of residence
- Nature of employment
- Medical ailments and history
- Smoking and other lifestyle habits
- Likelihood of claims being made by the person insured
- Height and Weight
- Marital status and dependents
- Hobbies with high risks
- Global travel history
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
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
1. Is insurance premium an expense?
2. What are the types of insurance premiums?
3. Can the insurance premium change during the tenure?
4. Is any grace period available for payment of the premium?
5. What are the options for paying the insurance premium online?
6. Can I cancel my policy, and if so, will I receive a refund of my insurance premium?