What is Premium in a Life Insurance Policy?

Premium in life insurance refers to the amount that a policyholder will pay either in a lump sum or regularly to purchase the insurance policy. It is also known as policy premium. The insurers normally provide monthly or annual premium amounts for the life insurance plans. You should also consider the total premium outflow on life insurance policies. Since life insurance plan are usually long-term make sure to balance between long-term and short-term savings while deciding on the premium.

Meaning of Insurance Premium

Life insurance premium refers to a specific amount to be paid periodically by the insured individual to maintain their insurance coverage, as calculated by the insurance company. For deciding the premium amount, an insurance company examines the type of coverage being opted, the lifestyle and health conditions, and the likelihood of a claim being made, among other factors. You may pay an insurance premium in a lump sum or as a regular sum.

How does Life Insurance Premium Work?

For the insurer, the insurance premium can consist of risk premium, investment premium, office premium and loadings, if any. The risk premium is the premium insurer must keep safe as it also increases the insurer’s liability to meet the demands for contingency claims from the policyholders.

Insurers will invest the investment premium to generate income for the policyholder. Office premium refers to the premium charged to cover administrative expenses for providing the insurance policy. For the purpose of accurate analysis of a person’s life and insurance premium calculation, companies employ actuaries. They are responsible for analyzing the risks associated with an event or claim, and then greater the risk, higher will be the insurance premium.

How to Calculate Life Insurance Premium?

If you are planning to buy a life insurance policy, you must know the factors affecting your insurance premium. As a rule, the earlier you buy a life insurance policy, the lower the premiums you pay. In addition, you may also be offered a better coverage duration and benefits. The following are the major factors that may affect your premium amount:

1. Age

This is the most important factor while estimating your life insurance premium. The base mortality premium is entirely based on your age.

2. Occupation

Different professions have different levels of health and life risks. Jobs like mechanical and civil engineering are more risky as compared to office jobs. Thus, such professions attract a higher life insurance premium.

3. Lifestyle Habits

Lifestyle habits like smoking and drinking are linked to a higher risk of diseases, which might require you to pay higher life insurance premiums. So, adapting to a healthier lifestyle may not only keep you safe in the long run but also get you better rates with life insurance companies.

4. Present & Past Health

Present health conditions and past medical records are required to assess your future health and the possibility of future diagnosis. In case of serious illnesses, your policy may attract a higher premium.

5. Sum Assured Amount

The higher your sum assured. the higher your premiums will be. However, with high premiums, you can attract discounts on the premium rates. Higher sum assured means that your coverage is high and for a high coverage, you will have to pay a higher life insurance premium.

6. Policy Term & Premium Payment Term

The premium payment term (PPT) cannot be higher than the policy term (PT). The lower your PT the lower your premium will be.

7. Hobbies

Hobbies like adventure sports can increase the risk of serious injury or death. Thus, your life insurance premium will be higher if your hobbies include activities that pose a threat to your life.

8. Marital Status & Dependents

Marital status and number of dependents may define your maximum life cover eligibility and capacity for premium payment. If you have several dependents, the insurer may try to offer a lower premium and lower sum assured cover.

9. Loans & Liabilities

Loans and liabilities assessment is a part of your financial underwriting. The insurer would want to assess that you will keep the commitment to regular premium payments. However, if you have multiple loans running, the insurer might want to reduce the risk of policy lapse and ask for a lower PPT or premium amount.

How to Pay Life Insurance Premiums?

There are several options offered in terms of premium payment against a life insurance policy. Policyholders can usually pay the insurance premium in installments on a monthly, quarterly, half-yearly or annually. This premium payment frequency is called the Premium Payment Mode. The mode of premium payment can be chosen by the policyholder at the time of buying the policy.

Then there is a Premium Payment Term, which determines the duration for which the premium needs to be paid, or number of installments. For iSelect Smart360 Term Plan, besides payment throughout the duration of the policy, you can choose a single bullet payment for entire policy duration or opt to pay for a limited duration of 5/10/15/20/25 years.

In addition, the plan also lets you choose a Limited Premium Payment Term Option, wherein you pay only during your working year that is till you turn 60 years old, while the insurance cover continues to run even after that.

What Happens if you Fail to Pay Life Insurance Premiums?

When the policyholder fails to pay a premium by its due date, the life insurance policy to goes into a grace period. Grace period. is the extra time given to you after a missed premium payment, before the policy finally goes into a lapse. If no premium is paid even during the grace period, the life insurance policy will lapse, causing the policy benefits to discontinue.

Therefore, life insurance premiums must always be made by the due date or the policy may lapse.

What does a Life Insurance Company do with the Premiums?

The premiums you pay for your life insurance policy is utilized in various ways by a life insurance company. Some portion of your life insurance premium is used towards day-to-day business operations, while some of it goes towards paying the death claim of beneficiaries of other policyholders.

Some portion of your life insurance premium is invested in different government bonds and investment plans to get returns.

Buying a life insurance online can also save you some amount on your premiums. Most online life insurance policies offer great discounts compared to offline plans, as they cut the paperwork cost and commission that is paid to an agent.

Life Insurance Premium FAQs

Can the insurance premium change during the policy tenure?

Most life insurance policies with regular premium payments come with level premium payments. That means your monthly or annual premium for the policy will remain same throughout the premium payment term. However, other insurance policies like health insurance, motor insurance, etc. will have different amount of premium every year.f your primary goal in buying the policy is to offer adequate financial protection to your family joint-term life insurance is a better option. However, if you plan to fulfil a future goal joint life endowment plan is a better choice as it has a maturity value.

Is premium yearly or monthly?

The standard premium estimate is always yearly. However, you can choose to pay a monthly, quarterly or half-yearly premium also. Nowadays, monthly premium payment mode is more popular due to the ease of payment.

What is waiver of premium rider?

Waiver of premium rider covers your life insurance premium in case of mishaps like accidental disability or critical illness. The premium waiver option ensures that your life cover continues even if the policyholder passes away. The insurer will pay your remaining life insurance premiums if you suffer from a covered health emergency.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.