Looking to buy an insurance policy? You would’ve come across the term “insurance premium” by now.
Premium happens to be an important component of any policy, whether it be life insurance or general policies. If we were to understand a policy as a contract between the policyholder and the insurance provider, it entails that both parties bring something to the table against which they get something in return. The insurer offers you the coverage as defined in the policy you choose, against which the policyholder is required to pay the insurance premium. Hence, premium can be understood as the amount that buys you the policy coverage.
Life insurance is understood to be a critical component of your financial portfolio. Understanding premiums in life insurance is important if you want to ensure better financial planning and security. Let’s take a closer look at what an insurance premium is and what it means for your life insurance policy.
What is an Insurance Premium?
In the context of life insurance, an insurance premium is simply a fixed amount you pay towards the sum assured or life cover, i.e., the money paid out to your dependents in case something unfortunate happens to you during the policy term.
The type of life insurance premium payment term as well as the frequency can be chosen by the policyholder as per the options available. The premium payment term refers to the duration for which you will be paying the premium. A common assumption may be that the term of premium payment is the same as the duration of your coverage. However, you can choose to have a limited premium payment term or a single premium payment as well.
On the other hand, the insurance premium payment frequency refers to how often you are required to pay your regular premiums. Some common options include - monthly, quarterly, and annually. Depending on the choices made, the premium amount can vary. A life insurance calculator can help you get these estimates based on various factors, so you may plan better. The type of life insurance premium payment term, and frequency, are only two of the many factors that influence the cost.
Now that you know what an insurance premium is, let’s look at the different aspects related to it.
How Do Insurers Use Life Insurance Premiums?
A life insurance company in India uses your insurance premium in different ways to ensure your policy works for you. A portion is set aside to cover the primary death benefit. This ensures that funds are available to support your beneficiaries.
Another part of the insurance premium may be used to cover the insurer's operational costs. This can include administrative services, agent commissions, and employee salaries. These are essential for the company's day-to-day functioning.
If your policy includes a savings or investment component, another segment of your premium is invested for that purpose as well. The returns generated from these investments are what fund the future benefits of such life insurance plans, such as bonuses, loyalty additions, or maturity values. They help your policy's value grow over time. This approach ensures the company can meet all its promises to you.
Types of Insurance Premiums
The two most important insurance plans every individual must invest in are life insurance and health insurance.
Life Insurance Premium:
Your life insurance premium depends upon the age at which you purchase the policy, along with your current health, professional, and lifestyle parameters as defined by the insurer.
Health Insurance Premium:
Your health is a crucial indicator of your health insurance premium. The insurer considers your lifestyle and habits, pre-existing ailments or conditions, your family’s medical history, occupation, and other factors.
What Happens If You Stop Paying Your Insurance Premiums?
If you stop paying your life insurance premium, your policy will enter a grace period. This will be around 15-30 days. You can settle the payment and continue coverage without penalty. If the premium remains unpaid after this period, your policy will lapse. This means the coverage terminates and the life cover ceases.
Life insurance plans that have a paid-up value may offer certain payouts in case the term insurance policy ceases. However, it is best to clarify this with your insurer before proceeding.
Factors that Affect Premium Rates
Insurers define insurance premium basis these factors:
1. Age
If you are young, you are considered to be healthier, and hence, there is a lesser chance of you making a claim. The premium costs much less, which is why, buying a life insurance policy in your 20s is not only affordable, but is also a smart move. Along with the initial savings, buying young allows you to secure a longer policy term. This ensures you are covered through critical life stages like starting a family or paying off a loan, all the while paying a consistently lower rate.
2. Gender
Statistical life expectancy data show that women often live longer than men. This can sometimes lead to slightly lower premium rates for female applicants of the same age.
3. Lifestyle
Smokers, people who consume alcohol, and adventure sports enthusiasts are slotted on the higher end of the premium costs scale and charged more. Their lifestyle choices could lead to complications in the future, which accounts for the higher premium.
4. Risky professions
If you are a firefighter, diver, law enforcement officer, construction worker or any other high-risk profession, be prepared to pay a higher premium for the same reasons stated in the above point. It is advisable to fully disclose your exact role for an accurate premium and to prevent future claim disputes.
5. Medical history
If you have a medical history of diabetes, cancer or any hereditary ailment, you may have to pay higher premiums. These conditions can highlight you as a risk. Hence, expect a higher premium rate for life insurance plans.
6. Sum Assured Amount
More coverage means more protection. But it also means a higher premium. Hence, buying a ₹1 crore life insurance plan will incur a higher premium than a ₹50 lakh life insurance plan.
7. Premium Payment Frequency & Term
For how long you will be paying the premium and how regularly may also influence the amount you pay. If you choose a limited pay policy (e.g., paying for 15 years to sustain 30-year cover), it will result in higher annual premiums than a regular pay policy. This is because you are compressing the cost into a shorter period (to be premium-free later in life).
8. Coverage Duration
This is another factor that can increase or decrease your insurance premium amount (in correlation with other factors). For a given age, a longer policy term will have a higher annual premium than a shorter one. This is because the insurer is exposed to the risk of a claim over a more extended period. In addition, the likelihood of a health event (and consequently, a claim) increases with age.
9. Policy Type
The choice between a pure protection plan (like term insurance) and a savings-oriented plan (like an endowment or ULIP) also affects the insurance premium. Different types of life insurance have varying premiums. Term plans offer the highest pure coverage for the lowest premium. Plans that include a savings component tend to have a higher premium amount.
A life insurance calculator usually considers most of these factors when providing estimates. However, estimates do not reflect the exact figures that you may have to pay. Consult an insurance expert so you may make informed choices.
Importance of Understanding Your Premium
A premium is not just an amount you pay. It is a lifelong commitment to protect your family’s financial security. Which is why it is important you choose a coverage amount that you can afford to pay for. You could be making payments anywhere from 10 to 30 years, so choose a premium payment that is affordable and sustainable.
The best way to choose a plan is by estimating your future goals, evaluating your current and expected liabilities, and the number of dependents that include your spouse, children, and ageing parents. Considering all these factors will help you budget appropriately and give you the best insurance value out of your premiums.
How to Calculate Your Insurance Premium?
Insurance companies offer life insurance premium calculators on their websites. You can use IndiaFirst Life’s Term Plan Calculator to determine the premium payable for the chosen insurance coverage by simply inputting the basic details.
Tips for Lowering Your Insurance Premium
Along with knowing what an insurance premium is, it is also important to know how you can adjust it within your budget.
Pay yearly:
Multiple premium payments attract extra charges to cover additional costs that the insurer has to pay. An annual premium payment negates this.
Start as young as possible:
You will have health on your side and hence, lower premiums as you are less of a risk.
Opt for Necessary Riders Only:
Choose your riders wisely, as they add to the cost. You can even purchase them later if you feel an imminent need, as some plans allow you to add riders to an existing policy at a later stage.
Live a healthy lifestyle:
One of the important factors that plays a role in determining your premium cost is your health. Focus on living better by eating well, getting ample physical activity, and regular check-ups as you age.
Buy online:
Getting an insurance policy online tends to get you a lower premium as you buy directly from the insurance company.
A premium is more than a mere expense. It is a crucial financial asset that provides the essential protection your family requires. So do not rush into the first option basis an ad or recommendations from family and friends. Compare different types of policies, research on what the insurance premium is for each policy and choose one that best suits your needs. Seeking the guidance of a financial expert will help you find the most affordable plan with the most benefits.
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