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 at different life stages. These policies may also pay out the benefits if the insured person outlives the policy term. In return for these death 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 an Insurance Premium Works? How Does an Insurance Premium Work?
When you buy an insurance policy, you pay a fixed amount of money. This amount is called a premium. As long as you pay the premium on time, your cover stays in place, which helps keep the policy active. You can choose how to pay the premium. Some people pay annually, while others pay monthly , half yearly, or quarterly. It depends on what suits their budget. If the premium is not paid on time, the policy may lapse, resulting in no coverage.
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 –
Gender
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
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 lower than what somebody older who wishes to purchase the same life insurance plan.
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
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.
Occupation
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. Occupations involving physical risk typically lead to higher premiums.
Medical History
If you or your close family members have had serious health problems like cancer or heart disease, your premium may be high.
Height and Weight
Your height and weight are used to find out your Body Mass Index (BMI). If your BMI is too high or too low, it may lead to a higher premium.
Factors to Consider While Buying an Insurance Policy
Picking an insurance plan may depend on several things. You can think about your age, family needs, and how much you can afford to pay easily. Here are a few simple points to look at before you choose a plan:
Current Life Stage
The current stage of your life may affect your insurance needs. A single person, a married couple, or a parent with kidseach stage might have different coverage. Pick a policy that suits your current stage in life and has the potential to take care of your plans.
Financial Requirements
Think about how much your family will need in case you’re not around. Include education costs, or day-to-day expenses etc. Choose a cover that suits your income bracket and offers good financial protection .
Duration of the Policy
This is the number of years your life insurance will protect you. Choose the term based on your goals. For example, if you have young children, you may want coverage until they grow up and become independent.
Riders
Riders, also known as add-ons, are extra covers you can add to your bas policy. These provide additional protection, such as coverage for critical illness, accidents, or disability. You may consider purchasing these at an additional nominal cost to increase your coverage.
Claim Settlement Ratio
This shows how many claims an insurer has paid out compared to claims received in a financial year. A high Claim Settlement Ratio means the insurer is more likely to payout claims efficiently. So, it is beneficial to choose a company with a promising record when it comes to the Claim Settlement Ratio.
Terms and Conditions
Always read the policy document carefully. This will help you understand what is covered and what is not. Check the document for what will happen if you miss payments, want to claim money etc. Understanding the terms helps you avoid surprises later.
How to Pay Life Insurance Premiums?
You can pay your life insurance premium in different ways depending from Insurer to Insurer.:
- Pay online using UPI, debit card, credit card, or net banking
- Set up automatic payments
- Pay at the nearest insurance branch in cash or cheque
- Some insurers allow payment through mobile apps
- If you get insurance through work, the amount may be deducted from your salary
Choose an option that fits with your routine and helps you stay on track with your payments.
How Often Do You Pay Insurance Premiums?
You can choose how often you want to pay your premium:
- Monthly
- Quarterly (every 3 months)
- Half-yearly (every 6 months)
- Yearly (once a year)
Paying yearly might help you purchase insurance at an affordable price. But if monthly works better for your budget, that’s also fine. Choose what fits you best.
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.
FAQs
Does an insurance premium count as an expense?
Yes, it is a regular cost you pay to keep your insurance policy active. But it’s also a way to protect your family from future financial stress, so it can be seen as a wise and valuable expense.
Is any grace period available for payment of the premium?
Yes. Usually a grace period of 30 days ( where premium is paid in quarterly/half-yearly/annual instalments)and 15 days ( for monthly premiums) is provided after the premium due date. During this time, you can pay the missed premium and keep the policy active.
What are the options for paying the insurance premium online?
You can pay online with the below options depending from Insurer to Insurer :
- Debit card
- Credit card
- UPI
- Net banking
- Mobile wallets
- Auto-debit from bank
Choose the one that’s easy and convenient for you.
Can I cancel my policy, and if so, will I receive a refund of my insurance premium?
Yes, you can cancel during the free-look period (usually 30 days from date of purchase). If cancelled during this time, you will get a refund after small deductions, as per policy rules.
Can I make a claim during the grace period?
Yes, if a valid claim arises during the grace period, it might be honored. During the grace period, the policy is considered to be in-force and the risk cover continues without any interruption as per the terms and conditions of the policy.However, it will only be honored if your premium was paid in the grace period. If your claim is made after the grace period and you did not pay your premium by then it will be denied due to the policy lapsing.
What is a Waiver of Premium Rider?
This is an add on benefit you can add to your policy. In case of death, disability or critical illness (as defined in the rider ), the insurance company may waive future premiums under this rider , subject to rider terms and conditions.
An ISO 9001:2015 
