Life can be very uncertain. And it is always a good thing to be prepared for what the future may hold. One of the ways to plan for your future is to purchase a life insurance plan. It helps ensure that your loved ones are safe and financially secure even in case something unexpected happens to you. A financial safety net can make sure that your family’s life goals are not affected negatively.
But what is life insurance anyway? And what is the meaning of life insurance premium? These are some basic questions that you may be looking for the answers to. And that’s just what we’re going to be discussing.
What is life insurance?
Every person who is new to the world of insurance has had this question - what is life insurance? In simple terms, life insurance is a contract between an individual and a life insurance company. Under this contract, the insurance company is legally bound to pay out an amount to the person nominated by the policyholder in case of the policyholder’s death.
There are different types of life insurance available in the Indian insurance market. Some, like the term insurance plan, offer a pure life cover. That means that these types of life insurance plans pay the nominee of the policyholder only on the policyholder’s death during the policy term.
Other types of life insurance, like savings plans and retirement plans come with added benefits that can help you fulfil the life goals you may have at different stages of your life. These policies may also pay out the benefits if the insured person outlives the policy term. In return for these deaths and/or maturity benefits, the policyholder will have to pay life insurance premiums to the insurance company. What is the meaning of this premium? Let’s find out.
What is the meaning of life insurance premium?
Life insurance premium is the amount that a policyholder pays the insurer to enjoy life insurance coverage and other benefits. Only if the policyholder pays all the premiums on time will the insurance company honour the contract and pay the policy benefits when they are due. Depending on the terms and conditions of the policy, premiums can be paid as a lump sum amount or in equal instalments. Life insurance plans also give policyholders the option to pay the premiums on a monthly, quarterly, semi-annual, or annual basis. Again, this varies from one plan to another.
How is life insurance premium calculated?
The life insurance premium for different types of life insurance plans depends on a number of factors. Insurance companies calculate the premium after taking into account various aspects like the gender of the applicant, their age, the policy term, the lifestyle of the applicant and sometimes, even their occupation etc.
Let’s take a closer look at how these factors affect the calculation of life insurance premium –
Women have been reported to have a higher life expectancy than men. So, life insurance premiums charged for women tends to be lower than the charges levied for male policyholders of the same age.
Age, by itself, also influences the calculation of life insurance premiums. All life insurance application forms will ask you for this information. This is because your age is a direct indicator of your health and life expectancy, in most cases. As expected, younger people tend to be healthier and live longer. So, the premiums charged for them are significantly lower as compared to what’s charged for older people. The younger you are, the lower your life insurance premiums will be.
For example, say you are 25 and you just got your first job. You purchase a life insurance plan with your first salary, and the cover it offers is for 40 years. This means you will continue to pay premiums until you are 65 years of age if you do not opt for a single payment option or a limited payment option. Since 40 years is several years away, the premium charged will be significantly lesser than what somebody older who wishes to purchase the same life insurance plan.
3. Policy term
The policy term is the duration over which the life insurance coverage remains in effect. Generally, the longer the policy term, the more instalments your cost is spread over. So, the premium charged per instalment will be higher for longer policy term.
Lifestyle choices like smoking and drinking will lead to higher premiums because these habits can reduce the life expectancy, resulting in early death. Similarly, other lifestyle choices like engaging in adventurous sports that pose a high risk to life also increases the premiums.
Some occupations are more dangerous than others. For example, a flight attendant’s job is riskier than the job of somebody who works at a desk in an office. The more hazardous a job is, the higher the premium.
Tips to reduce your life insurance premium
Now that you know the factors that play a key role in calculating life insurance premiums, here are some ways in which you can reduce these costs –
- Ensure that you remain healthy and fit. Exercise regularly.
- Quit harmful lifestyle practices like smoking and drinking.
- Buy life insurance when you are younger and buy it online if you can.
So, this sums up all you need to know about premiums for life insurance. When you purchase a life insurance plan, make sure that you pay all your premiums on time. This prevents your policy from lapsing, and you can continue to enjoy your life insurance coverage uninterrupted over the tenure chosen.