Life insurance is one of the most effective instruments of financial risk management. It covers you or your business from various financial risks arising due to any unforeseen event.
Life insurance covers your life and protects your family against financial loss arising out of your untimely demise.
The rate of any insurance policy varies based on the magnitude or possibility of the risk materialising. Life insurance policies work on the factor which determines the possibility of demise, also called ‘Mortality Rate’.
The life insurance premium will change as the mortality rate changes, and age is one of the most natural factors to affect this change.
So, yes with age the premium of a life insurance policy will also change. But only if you are buying a fresh policy. Once you buy a life insurance policy the premium remains level throughout the term.
Concept of Mortality Rate
Mortality rate refers to the rate of deaths taking place at a certain age in a defined population during a specific period. This is generally used as a basis for determining the amount premium to be charged from an insured person. The premium charged by an insurance company is thus referred to as the mortality premium.
What is the Mortality Premium?
Mortality premium is basically the fee charged by an insurer to provide life coverage to the insured.
A mortality charge is the amount charged for the financial risk that an insurance company may suffer because of so many policyholders dying a premature death (i.e. numerous death claims at a time).
Since this is charged against the guaranteed sum assured that will be payable on the early demise of the policyholder, it’s also referred to as mortality premium.
How is Mortality Premium Calculated?
The insurance companies calculate the mortality premium with the help of the mortality table.
1. The mortality table is a table created based on the previous data about the life expectancy of the human population. After interpretation of the past data, the Insurance Company actuaries can chart the Mortality table, and on that basis they calculate the premium to be paid.
2. The mortality table helps in ascertaining the human life expectancy taking into consideration the health conditions, diseases, and medical science development.
3. The amount of the mortality premium increases with your age. However, the mortality premium so decided will remain the same throughout your policy term.
The mortality table displays the death rate for a defined population within a specific period.
|COMMISSIONERS 2001 STANDARD ORDINARY MORTALITY TABLE|
|MALE AND FEMALE|
|AGE LAST BIRTHDAY|
|AGE LAST BIRTHDAY||MALE 1000gx||MALE LIFE EXPECTATION||FEMALE 1000x||FEMALE LIFE EXPECTATION|
The insurers take the Mortality Charge from the policyholder and keep it safe as the “Life Fund”. This life fund is used to pay out the Gross Death Benefit in case of your early demise during the policy term. It is important to note that the Life Fund is never invested anywhere else. The insurers will always deduct it and save it only to pay the Sum Assured to your family in case you don’t survive the policy.
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Other Factors Affecting Term Insurance Premiums
Besides mortality, many other factors decide the amount of premium you will have to pay. Apart from the health factor, these factors affect your mortality rate. This will impact the cost of your insurance, i.e. the premium to be paid by you.
Your lifestyle habits have a major role to play in deciding your premium. Certain habits like smoking and drinking put you at a higher risk of death. Hence, if you’re a smoker you will have to pay a higher premium than a non-smoker.
ii. Medical History
If you have a medical history in your family of certain diseases like cancer, heart ailment, or high BP, etc., then the insurance company may consider you susceptible to those diseases from a hereditary perspective. Hence, you will have to pay more premium
The type of occupation you are engaged in also plays a vital role in deciding the premium amount. Certain jobs like working in the mines, oil and gas industry, fisheries, or other such dangerous professions increase the death risk. Hence, if you are into such professions, you will have to pay more premium amounts.
iv. Policy Tenure
The term of your policy also decides the premium you need to pay for it. The longer your policy term, the larger will be the amount of the gross death benefit, since you will pay it for that period. Hence, your premium will be lower as compared to a short-term insurance policy.
v. Premium Payment Term
Another key factor is the premium payment term that you choose. If you choose a premium payment term shorter than the policy term, you will have to pay more premium. This is because you will have to pay all your premiums in a shorter duration.
vi. Riders Added
If you have opted for various add-ons or riders with your term life insurance plan, e.g. Accidental Death (ADB), Child Support Benefit (CSB), and Accidental Total & Permanent Disability (ATPD), etc., they will increase the cost of your insurance. You will have to pay more amount of premium for various riders you have added with your term plan.
So, these are various factors that decide the amount of premium you have to pay for your term life insurance.
Why Mortality Premium is Calculated for Life Cover?
A term life insurance provides you a degree of certainty about the future of your family after your death. However, there's some uncertainty for the insurance company due to your risk of death.
That's why an insurance company charges the mortality premium and expense risk for the life cover they provide. The mortality charge is based on the assumptions about your life expectancy, and the likelihood of your early demise.
With the estimate of life expectancy, the insurers can ascertain how much premium they should charge. In other words, you can also say that insurers estimate how much they might need to pay as the death benefit to determine the premium cost.
The mortality charge is intended to indemnify the cost to the insurer in the form of the death benefit they assure you in the policy contract.
Also Read : What is the meaning of Term Insurance