What Is a Life Insurance Premium and How Is It Calculated?

Buying life insurance can be one of the prudent, responsible decisions to secure your family’s future. However, the world of life insurance can appear overwhelming and difficult to navigate because of its terminologies. One of the most common words you’ll see throughout your policy search is ‘insurance premium.’ This seemingly simple term is the financial backbone of all life insurance policies. This blog aims to simplify the understanding of insurance premium and explain how it is calculated so you can proceed with your research with confidence and ease.

What is Insurance Premium?

When one is exploring insurance policies, it is useful to begin by understanding what is life insurance premium. You can view it as an amount paid/payable to the insurance company to keep your policy active. One way to think of it is the cost of securing financial protection for your loved ones. Insurance premiums can be paid at varying frequencies, depending on the policy’s terms. Life insurance premium varies from one policy and individual to another and is calculated based on various factors.

How Does Insurance Premium Work?

When you make the first insurance premium payment after signing the life insurance policy documents, you enter into a legal contract with the insurer. It makes the insurance company liable to pay the agreed sum assured to the nominee in case of your death, provided the policy was active at the time of death.

Continuous premium payments ensure the validity of the policy. If you’re buying your first life insurance policy and are unsure of how much premium it will require, use an online life insurance premium calculator to get an approximate estimate.

How is Insurance Premium Calculated?

Knowing what is the premium for life insurance isn’t enough to find the right policy; you must also know how insurers calculate premiums to get the best policy with competitive premiums. While insurers use several factors to calculate insurance premiums, the following are the most common:

• Age

Age plays a crucial role because elders are perceived as more prone to diseases and life-threatening conditions than their younger counterparts. Hence, premiums for young individuals are comparatively lower than those for elders.

• Lifestyle

Insurers generally keep higher premiums for individuals who frequently engage in risky activities like hiking, diving, racing, etc. You can expect slightly lower premiums if you don’t participate in similar activities.

• Medical History

Assessing medical history helps insurers determine the risk associated with an individual’s life. People who have suffered severe diseases in the past, underwent surgery, or have a family history of critical illnesses, etc., are more likely to be charged higher premiums than those who don’t.

• Profession

People employed in risky professions or industries, such as mining, the oil & gas sector, etc., are required to pay higher premiums because they’re regularly exposed to working environments that have some inherent risks.

• Policy Duration

A longer policy term typically increases the insurer’s risk exposure. Hence, longer policies may have slightly higher premiums than shorter policies. However, exceptions are always there.

• Income

Many insurers assume higher-income people have higher coverage requirements and a relatively lower perceived financial risk. Hence, premiums in such cases are comparatively lower.

• Marital Status & Dependents

The number of dependents influences the eligibility for life insurance coverage and premium payment capacity. Some insurers may reduce the sum assured cover and premium if you have a higher number of dependents.

• Sum Assured Amount

The higher the policy’s sum assured amount, the higher the premium and vice-versa.

• Rider Benefits

Every rider has an additional cost. Your premium will increase in direct proportion to the number of riders you add to the main policy.

• Residential Location

All residential locations have varying crime rates and environments. Hence, those residing in safer localities may get lower premiums than those living in risky locations.

These factors determine premiums for all types of life insurance, but some insurers can have additional factors in place. If you’re overwhelmed with premium calculations, always use a reliable life insurance premium calculator online to get approximate premium estimates.

Types of Insurance Premiums

Now that you’ve understood what is life insurance premium is and how it’s calculated, let’s take a quick look at some other common types of insurance premiums shared below:

• Health Insurance Premium

It is the amount you pay to keep your health insurance policy active. A health insurance policy typically covers medical expenses like hospitalization, surgeries, treatments, etc. 

• Auto Insurance Premium

As the name suggests, it is the amount you pay to insure your vehicles against financial damages arising from potential risks like accidents, theft, natural disasters, etc.

• Home owners Insurance Premium

Homeowners make periodic premium payments to financially protect their homes and belongings against risks like fire, natural calamities, theft, and riots.

• Renters Insurance Premium

Renters premium is the cost you pay to insure the contents of the rented home, such as furniture, appliances, personal belongings, and other possessions, against unfortunate events like theft, damage, fire, etc.

• Life Insurance Premium

A life insurance premium is paid to secure your family’s financial future in case of your death. 

Factors to Consider When Buying an Insurance Premium Policy

There are different types of life insurance products in the Indian market, so always use the following factors to find, evaluate, compare, and buy the right policy.

• Financial Requirements

You should begin by analyzing your current financial condition and deciding how much you want your family to receive for financial security in case of your death. In addition to insurance, you can consider investing in our Savings Plans or Protection Plans to diversify the safety net.

• Affordability

It is the most crucial factor that no one should ignore. Policies are generally long-term and demand steady premium payments to ensure validity. So, pick policies with reasonable premiums that can be paid easily and consistently. Consider doing a life insurance premium calculation based on your financial standing to maintain a balance between adequate coverage and affordability.

• Inclusions and Exclusions

No two policies are designed equally, so you must go through the policy’s inclusions and exclusions for clarity. Also read the terms and conditions regarding coverage, life insurance premium paying terms, exclusions, riders, maturity benefits, etc., to avoid hiccups at a later stage.

• Claim Settlement Ratio

Check the insurer’s previous claim settlement records to ensure your family receives the policy amount without hassle.

• Riders

If standard policy coverage seems insufficient, you can purchase riders that enhance the coverage, providing additional benefits to beneficiaries. Not all insurers provide the same riders, so check the insurer-specific website for accurate details. 

• Policy Duration 

You should always pick a policy duration that aligns with your long-term financial goals. It should also make it easier for you to make consistent premium payments without putting financial strain. 

What are the Key Factors Affecting Insurance Premium?

Numerous factors affect insurance premiums, such as the person’s age, medical history, marital status, number of dependents, profession, location, and much more. We have discussed all these factors above, so head to the ‘how is insurance premium calculated’ section for detailed explanation. 

What Determines an Insurance Premium?

In India, actuaries are responsible for determining insurance premiums. They use several financial theories, relevant statistics, and formulas to calculate the probability of various events, such as accidents, unemployment, marriage, retirement, etc., to determine the cost required to cover future claims, administrative expenses, and profit margin. They also use various factors, as discussed above, to ensure they finalize financially viable and fair premiums.

How to Pay Insurance Premiums?

Insurance premium payments can be made via multiple options. You can pay online using net banking, debit and credit cards, mobile apps, and online wallets like Gpay, Paytm, etc. Offline payments can also be made by issuing checks. Busy professionals can issue online standing instructions to their credit card partners for fixed, automatic deductions. Policyholders have the option to choose their premium payment frequency, such as monthly, quarterly, semi-annually, annually, or a single payment, depending on their preference.

What does an Insurance Company do with the Premiums?

Insurance companies use the premiums to cover potential claims arising from insured events. They also invest a portion of the premium in various financial securities and instruments, such as bonds, stocks, etc., to generate additional income. This income offsets operational costs and maintains competitive, fair pricing for all insurance policies.

What is an Actuary?

Actuary is a certified professional trained to use advanced statistical and mathematical methods to assess and manage financial risks and uncertainties, especially in the insurance industry. They calculate the potential cost of future events, helping insurance companies design policies to minimize those risks. 
Since actuaries are qualified experts in analyzing financial implications of uncertainty and risk through complex models based on social factors, demographics, economics, etc., they finalize the premiums for different types of life insurance products.

What Happens if You Stop Paying Life Insurance Premiums?

Delay in premium payment or entirely stopping premium payments can result in policy lapse. As a result, your family no longer remains eligible to claim the policy benefits. Most insurers provide a grace period to enable policyholders to make timely payments without incurring any penalty or coverage termination.

The grace period can be 15-30 days, but it varies from insurer to insurer. We encourage policyholders to review their policy’s life insurance premium-paying terms and grace period to avoid untimely policy lapse or penalties.

How Can I Save on my Life Insurance Premiums?

Buying a policy when you’re young is the best way to save on insurance premium payment. Maintaining a healthy lifestyle, avoiding risky activities, comparing quotes before finalizing a policy, and disclosing pre-existing medical conditions are additional ways to save on your premiums. We have discussed how different factors influence life insurance premium above, so you can use that information for extra savings. 

Conclusion

Having the right life insurance policy will ensure your family’s financial needs are met, even when you’re not around. To enjoy optimal benefits of life insurance policies, always invest in a policy with reasonable premiums and adequate coverage. You can explore our Shriram Life Early Cash Plan because it provides dual benefits of wealth creation through compounding and cash bonus guarantee, while giving life insurance protection.

Our Shriram Life Assured Income Plan is another great option that provides assured income and life insurance cover at low premium payment plans. We have various retirement plans, protection plans, etc., designed to achieve different financial goals, so explore the plans right for you.  Consider using the information in this guide and an online life insurance premium calculator to pick the right policy with reasonable premiums.