Premium in life insurance refers to the amount that a policyholder will pay either in a lump sum or regularly maintain the policy and keep the life insurance coverage in force. It is also known as a policy premium. Insurers normally provide monthly or annual premium payment options for the life insurance plans. Since life insurance plans are usually long-term, make sure to balance between long-term and short-term savings while deciding on the premium. You should also consider the total premium outflow on life insurance policies.
In this blog, we will explore the details regarding what a premium is in life insurance and how to calculate it. Keep scrolling through to know the details.
Key Takeaways
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A life insurance premium is the fixed sum that the insured person must regularly pay to the insurance company to keep their insurance policy active. For deciding the premium amount, an insurance company examines the following factors:
Type of coverage being opted for
Lifestyle and health conditions
Likelihood of a claim being made
Furthermore, you have the option to pay an insurance premium in a lump sum or as a regular sum.
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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 an accurate analysis of a person’s life and insurance premium calculation, companies employ actuaries. They are responsible for analysing the risks associated with an event or claim. The greater the risk, the higher the insurance premium will be.
When purchasing a life insurance policy, you will come across different premium structures. The choice of premium type affects affordability, flexibility, and long-term benefits. Below are the primary types of life insurance premiums:
Single-Premium Life Insurance: A single-premium life insurance policy requires a one-time, lump-sum payment at the outset. This fully funds the policy from the start, offering long-term coverage without ongoing payments. It suits those with substantial funds looking for immediate security and faster cash value accumulation.
Regular-Premium Life Insurance: Regular-premium life insurance involves periodic payments; monthly, quarterly, half-yearly, or annually throughout the policy term. This is the most common structure, making insurance accessible and budget-friendly, particularly for salaried individuals.
Limited-Payment Life Insurance: In the limited-payment option, premiums are paid for a fixed period (e.g., 10, 15, or 20 years), while coverage continues beyond. This is ideal for those wanting to complete payments early, ensuring financial security, especially in retirement.
Level vs. Increasing Premiums: Life insurance policies can have either level premiums or increasing premiums:
Level Premiums: The premium remains constant throughout the term, providing stability and easier budgeting.
Increasing Premiums: Premiums rise over time, often linked to inflation protection or increasing coverage, though they may become costlier.
Selecting the right life insurance premium plan ensures that you receive adequate coverage while staying within your financial means. Here's how you can choose wisely:
Now that you understand the meaning of an insurance premium, it is essential to know how it is calculated. Life insurance premiums are determined based on various parameters set by the insurer, including the applicant's profile and the type of policy chosen. However, you don’t have to manually compute the premium, as most insurance companies provide online premium calculators to simplify the process.
Consider the examples below to learn more about the calculation of life insurance premiums:
The following are the major factors that may affect your premium amount:
Age: This is the most important factor in estimating your premium in insurance. The base mortality premium is entirely based on your age.
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.
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.
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.
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. A higher sum assured means that your coverage is high, and for high coverage, you will have to pay a higher premium in insurance.
Policy Term & Premium Payment Term: The policy term and premium payment term directly impact the premium amount. A longer policy term generally results in lower periodic premiums, while shorter terms may require higher payments. Similarly, paying premiums over a shorter duration increases the premium amount. Choosing the right combination helps balance affordability with long-term coverage needs.
Hobbies: Hobbies like adventure sports can increase the risk of serious injury or death. Thus, your insurance premium will be higher if your hobbies include activities that pose a threat to your life.
Marital Status & Dependents: Marital status and the number of dependents influence the coverage amount you need, which in turn affects the premium. Individuals with spouses, children, or dependent parents usually opt for higher coverage to secure their family’s financial future. Higher coverage results in higher premium amounts. Insurers may also factor in long-term financial responsibilities while assessing overall risk and premium needs.
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 a higher premium amount.
A term insurance calculator is a useful online tool that helps you determine how much coverage you need based on your income, lifestyle, and family’s needs.
The above calculation and illustration of figures are indicative only and not on actual basis.
On average, life insurance premiums for women are approximately 15% lower than those paid by men because of women's longer life expectancy
Source: Business Standards
There are several premium payment options for a life insurance policy. Policyholders can usually pay the insurance premium in instalments on a monthly, quarterly, half-yearly, or annual basis. This premium payment frequency is called the Premium Payment Mode. The policyholder can choose the mode of premium payment 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 the number of instalments. Paying life insurance premiums is streamlined through diverse online and offline methods, catering to varying preferences and accessibility. Online avenues typically involve using the insurer's website or mobile app, where payments can be securely made using credit/debit cards, net banking, or electronic wallets. Automatic deductions and SMS alerts offer convenience by ensuring timely payments directly from bank accounts or cards. Alternatively, offline options include visiting bank branches to deposit payments, issuing cheques or demand drafts, or utilising insurance agents who collect payments in person. These methods ensure flexibility and reliability, enabling policyholders to maintain their coverage seamlessly.
When the policyholder fails to pay a premium by its due date, the life insurance policy goes into a grace period. Grace pieriod s the extra time given to you after a missed premium payment, before the policy finally lapses? 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.
The premiums you pay for your life insurance policy are utilised 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.
Life insurance premiums are the foundation of any life insurance policy, determining both the affordability of the plan and the level of financial protection it provides. Understanding how premiums work, the factors that influence them, and the available payment options empowers you to choose a policy that aligns with your life stage, responsibilities, and long-term financial goals. From age and health to coverage amount and payment terms, every element plays a role in shaping the premium you pay.
By carefully assessing your needs, comparing policies, and using premium calculators, you can strike the right balance between adequate coverage and manageable costs. Paying premiums on time and selecting flexible payment options ensures uninterrupted protection for your loved ones. Ultimately, an informed approach to life insurance premiums helps you secure peace of mind today while building financial resilience for the future.
In most life insurance policies, the premium remains fixed throughout the policy tenure, especially in term and traditional plans with level premiums. However, in certain plans with increasing premium options, the payable amount or charges may vary over time based on fund performance, policy structure, or selected benefits.
The standard premium estimate is always yearly. However, you can choose to pay a monthly, quarterly, or half-yearly premium also. Nowadays, the monthly premium payment mode is more popular due to the ease of payment.
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.
Yes, insurance premium is typically considered an expense because it represents the cost paid by the policyholder to obtain and maintain insurance coverage. This expense is incurred regularly (e.g., monthly, quarterly, annually) to secure financial protection against various risks such as health issues, property damage, or loss of income.
A policy premium refers to the contractual payment made to keep life insurance coverage active. It is the fixed amount securing protection for policyholders.
The premium is the fixed amount you pay periodically for your cover. In life insurance, the premium depends on the policy type, coverage, and tenure.
Insurers evaluate age, health, occupation, sum assured, lifestyle habits, and policy type through actuarial analysis to determine the appropriate premium.
Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.
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