Life is precious and we make efforts to protect it from different circumstances. The cost of life insurance premium is determined by the level of coverage we require. The insurance companies also take certain criteria into consideration while calculating the premium. Below are some of the points listed which affects the life insurance premium.
- The level of coverage a buyer would prefer to buy, the higher the coverage, costlier becomes the life insurance policy.
- The health condition of the policy buyer also helps in determining the cost of the life insurance plan.
- The age and sex of the applicant matters while calculating the premium. The older you are the premium becomes costlier. And for females the cost of the premium is slightly cheaper because as per the analysis women live longer than men.
- Mortality cost is the cost of paying claims to the beneficiaries of insured people. The cost for most insurance companies has declined over the years. This means there is a longer period to collect premiums and the death claims are paid out later than originally anticipated. Still companies have to be careful while selecting the new policyholders who are basically healthy. They should charge rates which reflect the actual mortality risks of those people who have serious health problems or who engage in potentially dangerous activities. Otherwise, they might have higher than expected costs for death claims, which could cause financial difficulties.
- Operations cost, the cost of operating the insurance company and selling its products. These costs includes marketing costs like commissions, operating sales offices, advertising expenses, etc and non-marketing costs like the cost of constructing and maintaining company buildings, salaries of officers and staff, etc.
- The return on investments, the Insurance companies invest money until they need it to pay claims or expenses. The good investment returns may help pay off their expenses which might ultimately reduce the cost of insurance premium. This will enable them to sell policies at lower premiums and compete more effectively against other insurance companies.
The overall effect of all these factors determines how much the company needs to charge in order to provide life coverage while making a profit and paying dividends to its policyholders, if it is a mutual insurance company. Several large mutual insurance companies have recently transformed into stockholder owned companies through a process called demutualization. In stockholder owned companies, dividends are paid to the stockholders.
Companies that feel the need to become more competitive can offer higher benefits to the customers by lowering the cost of the premium and pass on the savings to the customers.
- Cut marketing costs by reducing marketing staffs, trimming commissions, selling directly to customers by phone, mail, or over the Internet,
- Cut non-marketing costs by having less workers and managers, move to a smaller building, lowering the pay scale for new workers, cutting raises and bonuses for existing employees;
- Increase return on investment by making use of various investment instruments.
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