scorecardresearchExplain Like I'm 5: What is a Life Insurance premium?

Explain Like I'm 5: What is a Life Insurance premium?

Updated: 30 Mar 2022, 05:07 PM IST

The premium is the regular monetary payment which a subscriber pays to the insurer to keep the policy running. If one fails to pay the premium, the policy stands to get terminated. We decode this for you.

Premium is the sum of money you pay to your life insurance provider in return for protection.

Premium is the sum of money you pay to your life insurance provider in return for protection.

Being fluent in life insurance takes a while, but there is one phrase with which you should become somewhat familiar to i.e. premium. This term is significant since it determines how much you will pay to maintain your life insurance coverage.

Simply stated, "Premium" refers to a monetary payment. It's the sum of money you pay to your life insurance provider in return for protection. The payout (also known as a death benefit) is the amount of money paid to your beneficiaries by the life insurance company if you, the policy holder, passes away unexpectedly. In the event that you are unable to pay your premiums, your family will no longer be covered by life insurance. That's why it's critical to acquire insurance with affordable premiums which can be substituted as instalments for better understanding.

The premium is earnings for the insurance business once it has been received. In return the insurer is obligated to cover any claims made against the insurance. The termination of the insurance may occur if the individual or business fails to pay the premium.

What is Life Insurance premium

The term "insurance premium" refers to a certain sum that the insured person must pay on a regular basis to retain their insurance coverage, as determined by the insurance provider. An insurance company considers the type of coverage chosen, the possibility of a claim, the policyholder's lifestyle and health circumstances among other things, when determining the premium amount.

READ MORE: How to file a life insurance claim?

Factors determining Life Insurance premium

Let us understand the determinants that are taken into consideration while calculating Life Insurance premiums.

Type of policy selected

Whole life insurance policies contain a cash value component that can increase or decrease in value over time and can be utilised while you're alive. Hence, their rates are five to fifteen times more expensive than term life insurance premiums due to these additional characteristics. Term life insurance is significantly less expensive and, for most individuals, the best option.

Amount covered

The more coverage you have, the higher your rates will be. A 35-year-old female with no severe health issues, for example, can pay around 1500 Rs.per month for a 20-year, 3 crore term insurance, but 3000 Rs. per month for a 20-year, 6 crore coverage.

Age of the policyholder

The younger you are, the cheaper your insurance premiums will be. In contrast, the older you become, the higher your insurance rates will be. The cost of life insurance is greater for older applicants. Premiums rise by an average of 4.5-9% every year as you become older.

Duration of the policy

The cost of a term life insurance policy varies based on the length of the coverage. It can be explained as purchasing coverage for 30 years will be more expensive than purchasing coverage for 20 years because the longer the duration, the insurer is more likely to cover the death benefit. As a result, picking a term length that is not longer than your real requirements will save you money.

Health and hobbies

Health and hobbies of the policyholder is another key factor assessed while calculating the premium. Smoking and drinking are related to an increased risk of sickness, which may necessitate paying higher life insurance rates. As a result, adopting a healthier way of life may not only keep you safe in the long term, but it may also help you receive better insurance rates.

Actuaries are employed by insurance firms for the purpose of precise life analysis and premium computation. They are in charge of assessing the risks connected with a certain incident or claim, and the bigger the risk, the higher the insurance premium.

To conclude, it can be said that the risk that a person might incur during his lifetime is transferred from the insured to the insurer under an insurance arrangement and premium is the amount charged by the insurer for accepting this risk.

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First Published: 30 Mar 2022, 05:07 PM IST