27th May 2024

What Is Insurance Premium – A Complete Guide

When you get an insurance policy, you have to pay a fixed premium for a certain period of time. But does it remain the same for everyone or does it vary? Premium quotes depend on various factors and do not remain the same for everyone. So, today let’s discuss what an insurance premium is, the factors that affect it and the modes of payment.

What Is an Insurance Premium?

An insurance premium is an amount that you have to pay to the insurance company in return for a life insurance coverage. This premium depends on the type of policy you choose and various other factors. Insurers appoint actuaries to determine the probability of you filing for a claim to know the premium quote. Actuaries take various aspects into consideration and set certain units to these factors. After this, an underwriter works out the final premium quote for you by multiplying these units with the risk factors.

Factors That Determine Insurance Premium

Here are the factors that play a crucial role in deciding the premium price for your life insurance policy:

  • Age

Age is an important metric that affects your premium quote, hence, it is advised to get a life insurance policy in your early 20s and 30s. When you get a policy at an older age, the premium cost will be high due to high chances of health risks.

  • Gender

Insurers use statistical data to ascertain life expectancy of males and females in the population. This information is used to determine the premium quote for both the genders with lower life expectancy.

  • Health

The current and past health records aid the insurance company to understand how healthy you are and the potential health risks. You may also be asked to take a medical test for further determination. Lifestyle habits like smoking and drinking highly affect the chances of having a costly premium quote.

  • Medical Records

The medical records of your family have to be submitted for the insurer to know the probability of you getting diagnosed with an ailment.

  • Type of Coverage

There are numerous insurance policies available nowadays that not only provide you with a life cover but also aid in savings. So, the type of coverage and policy you choose greatly influences the premium quote. If you choose term insurance with higher coverage then you will end up with a pricey premium cost.

  • Sum Assured

The relation between the premium amount of your policy and the sum assured is directly proportional. This means greater coverage will lead to a higher premium. But the sum assured should be an aspect that you should comprise with as it is crucial in case something happens to you. 

Different Types of Premiums

There are two types of premiums that are commonly for life insurance policies which are:

Level Premium

Level premium is where the premium rate is fixed for the entire policy and doesn’t change.

Flexible Premium

In flexible premium, you are enabled to make changes in your term plan to increase the coverage or add members to the policy. These modifications lead to a change in the premium price.

Modes of Premium Payment

There are four modes of premium payment frequencies that you can choose as per your liking which are:

  • Monthly Payment

Monthly payment mode lets you pay the premium on a monthly basis. It is observed that a monthly mode can lead to paying higher rates than the cost paid via other modes.

  • Quarterly Payment

Quarterly payment mode allows you to pay per quarter which is four times a year.

  • Half-Yearly Payment

The half-yearly mode is where you have to pay the premium twice per year.

  • Annual Payment

An annual payment mode enables you to pay once a year which can lead to a high premium amount but in the long run results to an affordable policy.