Life insurance has its own kind of language. Terms like rider, beneficiary, and underwriting come to mind frequently when you are buying a life cover. Being familiar with life insurance completely requires persistence, but if there is one term that needs extra attention is Premium. This term is essential because it has everything to do with what you will pay to keep your life cover going.Read more
Understanding how life insurance premiums work is important to finding coverage that protects your loved ones without placing your monthly finances at risk. Let’s discuss:
A life insurance premium is a fixed amount of money to be paid on a periodic basis by the policyholder to the insurance company in exchange for the life insurance cover. As long as your premium amounts are paid on time, your life cover will remain active for the policy term. This protects the financial objectives of you and your dependents. In order to decide the premium, an insurer examines the coverage type that is being opted for, the lifestyle of the policyholder and medical conditions, annual income, and the probability of a claim being filed.
Generally, life insurance premium amounts are paid monthly, quarterly, or yearly depending on your requirements.
For the correct analysis of an individual’s life and calculating life insurance premium, insurers employ actuaries. These actuaries are responsible for examining the risks related to a claim or an event, and then more the risk, the premium amount also increases.
There are number of options available to pay premiums for your life insurance plan. Generally, policyholders have the option to pay a premium in form of installments on a yearly, bi-yearly, quarterly, and monthly basis. This frequency of paying premiums is referred to as a premium payment mode.
Premium payment term is also an important term, which helps determine the tenure for which the premium or number of installments is required to be paid.
If you fail to pay a premium on time, then your plan goes to a grace period. Now, you must be thinking, what’s the grace period? The grace period is the additional time provided to you after a missed payment premium amount before the plan goes into a lapsed state. If during the grace period, no amount of premium is paid, your plan lapses.
Now you know what is life insurance premium, and you must be thinking that how my premium amount is going to be used by the insurer. So, the premium you pay towards your life insurance policy is used in several ways by a life insurer. Some part of the premium is used for managing daily business operations, whereas some of it goes to pay the death claim to the policyholder’s beneficiaries.
Moreover, some parts of the premium also get invested in various investment plans and government bonds to receive returns.
If you are looking out to purchase a life insurance policy, you should consider the following factors while deciding on the premium amount.
Age: The early you buy a life insurance plan, the lower would be your premium amount. Because life insurance company calculates the premium rates depending on your life expectancy and will typically set low rates for individuals who have less risk of passing away early.
Gender: As per the experts, the average life expectancy of women is higher than that of men. This means that women can avail policies for a longer time than men and thus they can get low premium rates.
Lifestyle: Lifestyle practices such as drinking, smoking, and tobacco use are associated with a higher threat of ailments, which might need you to pay a higher amount of life insurance premiums. Thus, accepting healthier lifestyle habits will keep you secure in the future and also provides you with good rates with life insurers.
Apart from them, there are some other factors also that may impact your premium to decrease or increase:
When purchasing a plan, the sum assured and the policy term chosen will also help in determining the right premium amount.
Sum Assured: Ideally, the sum assured amount chosen is directly proportional to the amount of premium. This simply means, that the higher the life cover, the higher will be the premium rate of your term insurance plan. Using an online life insurance calculator, you will understand that the policy premium increases when you increase the life cover amount. In addition to this, the selection of sum assured should depend on your individual requirements, total income, existing liabilities, and other factors.
Premium Payment Term: The shorter the term of paying premiums you choose, the higher will be the increase in insurance premium
Buying life insurance is important these days, but it does not mean that you should put your monthly finances at risk by opting for an expensive premium. Research carefully by determining your needs and buying the best life insurance plan with low rates of premium.