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. 1. Age

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.

2. 2. Area of residence

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.

3. 3. Nature of employment

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.

4. 4. Medical ailments and history

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.

5. 5. Smoking and other lifestyle habits

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.

6. 6. Likelihood of claims being made by the person insured

If you have a history of making claims, your premium might be higher as the insurance company may anticipate future claims.

7. 7. Income

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.

8. 8. Height and weight

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.

9. 9. Marital status and dependents

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.

10. 10. Gender

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.

11. 11. Hobbies with high risks

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.

12. 12. Global travel history

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.

13. 13. Debts

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. 1. Insurance premium

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

2. 2. Policy term

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

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.

People like you also read ...