Almost all of us are aware that premium is the price which is paid to buy the policy. However, there are several aspects of the premium which are not well-understood. It is the premium which makes the insurance contract complete. It varies across insurance companies and plans. It can vary according to the sum assured and the proposer’s age. The mode of paying the premium depends on the policy and the payment options which are offered by the policy.
As per the limit set by IRDA, premiums can be paid up to Rs. 50,000. In all cases the premiums need to be paid in advance. For most insurance companies premium can be paid online which makes the transactions easy. At times insurance companies also offer saving on the premium rate based on the sum assured. These savings are known as rebates. Usually the companies offer rebates on policies with higher sum assured. As the cost of servicing policies remains the same for all kind of policies, a higher sum assured means that the cost of servicing per unit of the sum assured is lower. This in turn translates into higher profits for each unit of the premium paid.
You may choose to pay the premium monthly, quarterly, half yearly or annually depending on your cash flow. It is obvious that the cost of servicing the premium is higher, higher the frequency. However, if the premium is paid at one go for the whole year, the funds remain with the company for a longer period of time than in case of monthly payment. Hence, when the premium is paid at one go, the insurance company can earn higher returns. Some insurance companies offer rebates on annual premium payments which are worked in the premium rate.
Servicing costs for premiums which are paid online are lower than for those which are paid physically. When premium is paid online, the company saves on the commission which needs to be paid to the agents as in case of policies which are physically sold. Varying across companies, rebates are offered on the online rates which are quoted. It has been witnessed that the rebate in case of online payments is higher than rebates which are offered on physical payments.
For people who do not carry additional risk, the ordinary premium rates are applicable. However, in case of the people who carry extra risk, such as health problems like heart disease or diabetes the insurance company may charge extra premium. At times extra premium is charged when the policy holder is involved in a hazardous occupation. When the insured opts for additional riders with the base policy extra premium is charged.
The term “loading’ comes into play when an insurance company deals with high-risk candidates. Insurance companies take resort to loading when the risk of the individual is higher than normal circumstances. It can be due to medical history or a hazardous pastime as well. Let’s understand loading with a scenario. Sumit Sharma, a resident of Noida had applied for a mediclaim policy a few years ago and seemed very satisfied with the policy. When he had to undergo a sudden heart surgery, the insurance company readily honored the claim which he made. However, when he tried to renew the policy he was in for a shock. The rates of premium had shot up substantially. When he enquired about this from the insurance company, they told him that it was because of loading.
A Scenario Where ‘Loading” Affects the Premium
Loading was something Mr. Sharma had never heard before. Loading can be defined as an additional cost which is built into the insurance policy. This is done when losses which need to be covered are much higher than those which have been anticipated by the insurance company. Loading usually arises when insuring a person who is prone to risks. Before you decide to pay the insurance premium, it is important that you familiarize yourself with “loading”. It is important to note that loading happens mostly in health and life insurance plans.
Loading can be medical, occupational or residential. In a group if all are healthy and one member is obese, the premium charged will be higher. When someone is obese there are higher chances of damages being caused to organs like heart, kidney and brain. Owing to these adverse conditions, medical loading affects the premium. Additionally, some people live in countries where there is political unrest. They have to witness residential loading. By controlling certain factors you can ensure that the insurance company charges you lower premium.
In the context of premiums, the level premium also needs mention. In this case, as the name suggests, the premium charged in the duration of a contract remains the same. Contrary to loading, the premium which is guaranteed by the insurance company cannot be changed at a later date. This proves advantageous both to the insurance company and the life assured. The advantages of level premium are many. As with age, the mortality risk increases, the actual premium which is charged is higher than what is charged when a person is young. It may so happen that the premium charged for a person in his old age may be so high that he is unable to pay. This is where level premium emerges as a viable solution. Further, it is administratively difficult for an insurance company to keep track of and collect varying premiums. Level premium is the suitable answer to these hazards.
The premiums which you pay under a life insurance policy are eligible for deduction under Section 80C of the Income Tax Act. The life insurance premium which you pay for your in-laws or parents is not eligible for deduction. In case you pay premium for several policies, all the premiums can be included. The insurance premium which you pay for yourself, for your children or for your spouse qualify for deduction under section 80C.
To ensure that a policy does not lapse, you need to pay the premium regularly. One of the most traditional ways to make payments of the premium is through a cheque. You can also pay the premium by using your credit card. All you need to do is fill up the credit card instruction form which you can download from the insurance company’s website or collect it from their office. Additionally, if you find it difficult to remember your premium date, you can choose an auto-debit way. You can provide instructions to the bank according to which the premium will be debited from your account automatically and the money will be transferred to the insurer. If the bank is not easily accessible, you can consider paying the premium through net banking directly from your bank account. Further, some insurance companies also offer SMS alert facilities. This will ensure that you get reminders on payment of premiums by SMS.
In case you forget to pay the premium, there is a grace period of one month. During the grace period the policy will remain valid. However, after one month the policy will lapse. In case of eventualities the insurance company will not entertain claims. It is important to note that the policy can be revived within 5 years from the date of the last unpaid premium. You will have to pay the unpaid premium along with a penalty for late payment.
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