What is the Meaning of Premium in a Life Insurance Policy?

2025-07-01

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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.

In this blog we will explore the details regarding what is a premium in life insurance and how to calculate. Keep scrolling through to know the details.

Key Takeaways

Life insurance premiums must be paid regularly to keep the policy active. They can be paid in a lump sum or through periodic payments, depending on the policyholder’s preference.
Different premium payment structures exist, including single-premium, regular-premium, and limited-payment options. Level and increasing premiums offer further flexibility based on financial planning needs.
Premium amounts are calculated based on factors such as age, health, occupation, lifestyle habits, and sum assured. Online premium calculators can help estimate costs before purchasing a policy.
Selecting the right life insurance premium plan requires assessing financial goals, comparing policies, considering coverage duration, and evaluating premium payment flexibility.
Failing to pay premiums within the grace period can lead to a policy lapse, resulting in the discontinuation of benefits. Choosing automated payment options can help maintain policy continuity.

Meaning of Insurance Premium

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

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.

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 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.

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Types of Life Insurance Premiums

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: With limited-payment life insurance, 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.

How to Choose the Right Life Insurance Premium Plan?

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:

Assess Your Financial Goals and Budget
Before choosing a life insurance plan, evaluate your financial objectives. Are you looking for pure life cover, wealth accumulation, or retirement planning? Additionally, assess how much premium you can afford without straining your monthly expenses. If your primary goal is to secure your family’s financial future in your absence, a term insurance plan with an affordable premium might be the best option. However, if you want a mix of insurance and savings, an endowment or ULIP plan could be more suitable.
Compare Different Insurance Policies
Meera, a 35-year-old working professional, decides to buy a whole life insurance policy with a sum assured of ₹50 lakh. Since whole life insurance provides lifelong coverage and has an investment component, her premium will be higher compared to a term plan. Based on the calculations, her annual premium could be around ₹50,000.
Consider Policy Term and Coverage Amount
Amit, a 28-year-old smoker, chooses a term plan of ₹75 lakh for 25 years. Due to his smoking habit, his premium will be significantly higher than that of a non-smoker. His estimated annual premium could be ₹18,000, while a non-smoker of the same age and policy would pay around ₹12,000.
Check Flexibility in Premium Payments
Some policies offer flexible premium payment options such as monthly, quarterly, or annual payments. Additionally, insurers may provide limited-pay or single-premium options for policyholders who prefer to complete premium payments in a shorter period.

How to Calculate Life Insurance Premium?

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:

Example Scenario 1:
Rahul, a 30-year-old non-smoker, opts for a term insurance plan with a sum assured of ₹1 crore for 30 years. Based on his profile and policy type, his estimated premium could be around ₹10,000 per year. However, if he had opted for the same policy at the age of 40, the premium could be nearly ₹18,000 per year due to the increased risk factor.

Example Scenario 2:
Meera, a 35-year-old working professional, decides to buy a whole life insurance policy with a sum assured of ₹50 lakh. Since whole life insurance provides lifelong coverage and has an investment component, her premium will be higher compared to a term plan. Based on the calculations, her annual premium could be around ₹50,000.
Example Scenario 3:
Amit, a 28-year-old smoker, chooses a term plan of ₹75 lakh for 25 years. Due to his smoking habit, his premium will be significantly higher than that of a non-smoker. His estimated annual premium could be ₹18,000, while a non-smoker of the same age and policy would pay around ₹12,000.

Factors Affecting Life Insurance Premium Calculation

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

Calculate Term Insurance Premium

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.

My Income

My current Cover

Additional Details

Our Recommendation

My Income

My current Cover

Additional Details

Our Recommendation

I am {age} years old,

My Monthly income is {amount}

Additionally, I hold existing Insurance Cover of Rs {insurenceamount}

and loan amounting to Rs{amount}

My name is {name}

my mobile number is {contact}

50 Lakh

12.5 Lakh

75 Lakh

Zero

1 Crore

Where do you stand

Additional Life Cover

Hi {name}

To secure your family’s financial future and protect their dreams, you’ll need an additional cover of

rs 10,000

Note: This is a very brief calculation of HLV

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Desclaimer-

The above calculation and illustration of figures are indicative only and not on actual basis.

Did You Know?

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

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 instalments on a monthly, quarterly, half-yearly, or annually. 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.

For the iSelect Smart360 Term Plan offered by Canara HSBC Life Insurance, you can choose a single payment term for the entire policy duration or opt to pay for a limited-pay duration of 5/10/15/20/25 years, besides payment throughout the duration of the policy.

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.

Wrapping Up!

Life insurance premiums represent a financial obligation that you must meet to safeguard your loved ones or plan future growth. Understanding the meaning of insurance premium and the premium amount will help you make informed decisions, select suitable coverage options, and integrate life insurance into comprehensive financial strategies.

Buying 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.

Glossary:

Premium Payment Term: The duration over which premiums are paid or the number of instalments required.
Base Premium: The core amount charged for life insurance coverage, excluding additional riders or benefits.
Riders: Optional add-ons to a life insurance policy that provide additional benefits for an extra premium.
Lapse: Termination of a life insurance policy due to non-payment of premiums after the grace period.
Mortality Premium: The part of the premium that reflects the expected cost of claims due to death benefits.

FAQs Related To Life Insurance Premium

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.

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.

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.

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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