Loading in Insurance Policies

Mr. Ravi Yadav purchased a health insurance policy a few years ago from a renowned insurance company. He was very satisfied with the policy for about a couple of years as the company readily honored his claim for the expenses he incurred when he had a sudden heart surgery. When his renewal was due, Mr. Yadav was really shocked with the increase in premium. Further to his inquiry, he was informed that the reason behind this sudden increase was ‘loading’.

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    So what is loading in an insurance policy?

    Loading is an additional amount that is built into the insurance cost. This amount is added to the premium to provide the cover for a ‘risky’ individual. Basically, loading covers the losses that arise from insuring an individual who is prone to a form of risk and the losses for that period are expected to be higher than anticipated. 

    I and my manager purchased life insurance policies that were exactly same. However, her premium was substantially higher than mine. When inquired, we got to know that this difference in our premiums was due to the difference in our ages.

    Therefore, the higher your age, the higher is loading. So, loading comes into play when the person insured with a company is comparatively more prone to a sort of risk than in ordinary circumstances. Also, the amount of loading applied is different for different individuals.

    What are the factors that affect loading? 

    Loading majorly applies to life and health insurance plans. Following are the factors that might affect the amount of loading applied to your policy, and hence your premium.

    • Age: Premium in a life insurance plan is usually dependant on the amount and term of insurance and the type of plan you want. However, the main factor that affects, or rather determines, the premium is your age. The reason is that as your age increases, the probability of mortality increases and this leads to a significant difference between the premiums. For instance: A 25-year old non smoker needs to pay Rs. 464 per month to get a sum assured of Rs. 1 crore, while a 35-year old non-smoker will have to pay Rs. 665 per month to get the same sum.

    • Smoking: Smoking or any other form of contact with tobacco or nicotine is another factor that majorly impacts the amount of loading applied to your premiums. Both health insurance and life insurance premiums for smokers can be almost double the premiums for non-smokers due to an increased risk of smokers getting sick or dying younger. For example, a 25-year old non-smoker pays Rs. 5577 per annum to get a sum of Rs. 1 crore, while to get the same cover, a 25-year old smoker pays Rs. 9270 per annum.

    • Medical state:  Medical state of an individual is another factor that determines the loading applicable to his premiums; especially health insurance premiums. For example, let’s take the case of a group of applicants, who are all healthy and 45years of age.  In this case the premiums payable for all the people will be equal because the probability of mortality for all will be the same. However, if one person from the same group was obese, he would have to pay a higher premium that the rest of the people; because there is a comparatively higher probability of his organs like brain, heart, and kidney getting damaged.  In this situation the extra amount of premium charged from this person is what is called loading or medical loading.

    Additional factors which may affect the mortality and eventually loading are:

    • Obesity
    • Various medical conditions in the proposed insured as well as in the family 
    • Occupation 
    • Place of residence 

    Is loading justified? 

    Loading is justified in some cases, while it might not be in the rest.

    Most of the health insurance companies have a particular age before which one cannot buy an insurance policy.  The maximum age for buying a policy varies from 65 to 80 years, depending on the insurer. The reason behind applying this ceiling is the difficulty in determining the risk factor which ultimately contributes in determining the premium.

    Applicants often are already suffering from major ailments such as diabetes, hypertension or asthma. Clients also have bad habits such as chewing tobacco and smoking. If an insurer is accepting applicants despite having a health ailment, past medical history, and adverse family history, he would certainly offer the policy on special terms with significant loading. 

    For an insurer, it covers the losses for a period when they are expected to go higher than anticipated because of a risk-prone customer. It also benefits the clients who have a slightly higher risk factor by making them eligible to get an insurance cover. Also, if the customers with high and low risk factor pay equal premiums, it would be injustice to the client who is less prone to risk.  

    However, loading is not justified in a certain instances for instance, when loading is applied to an individual with a history of surgeries like cataract or hernia. Both of these are easily treatable and have a negligible risk of further complications. 

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