What is Insurance Premiums? Types, Qualities and Significance

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Understanding ABC's of Insurance is at the wit’s end for most of us as this is not just a topic for discussion, it is an entire subject that only experts understand. But Insurance as a service is not a rarity and every second person owns an insurance of some kind. This brings up an important question to the surface that when Insurance is commonly bought, then why not most of us are very well aware of this subject. Let us face it, the reason for the majority of insurance owners being not aware enough about the subject is the lack of interest to dive into the details. Fortunately, today in this discussion, we are going to talk about one of the most common and important aspects of any insurance i.e. premiums. We will discuss the premiums in details discussing its types, how it is determined for an insurance policy and a lot more. The reason behind picking up Premiums as the moot point for today is that if we are going to talk something about insurance policies in detail, then premiums will always be on the top to grab your interest, right. So without wasting any more time, let us get started.

What is Insurance Premium?

While answering this question, our readers would be divided into two groups. One who is interested in knowing only the basic information without any interest in technicalities and the second one would be the who would like to know it all without leaving anything behind. Strangely, the truth is that the situation with defining an insurance premium is binary i.e. you can either define the basic or you can go all in, there is no middle ground. Now, let us start with defining the basic and then we will head into the complexities.

In its simplest form, the Insurance premium is the cost of your insurance policy. it is the amount that you pay to your insurer in exchange of which you get the policy coverage. You can choose the insurance policy based upon the coverage and policy period like term insurance plan or annuity plan or mediclaim but the priority factor that will help you zero in on a choice will the premium that you will have to pay for the insurance.  

Now, for the readers who are interested in the complete knowledge of the premiums, to be honest, you would have to wait for the answer as you have to read till the end because let’s face it you chose to do so, you cannot get complete knowledge about the insurance premiums in just a para.  

Calculating the insurance premium for a policy

To really learn about the insurance premiums and its types, you should first learn about the process of how the insurance premiums are set for a particular insurance plan available in the market whether it is a term insurance plan or an endowment policy. so, this is how it will go, we’ll first learn about the factors that are considered for calculating the premiums and then we’ll know about who are the people that calculate the insurance premiums for a plan. Let’s start:

Factors that affect the premium amount

Personal Information

Any insurance agent will always ask you for your personal information before giving you the options for any types of insurance policy. This information includes your age, location, habits, daily commute, annual income, family size etc. this information helps the insurance companies to decide your probability of making claims. These days many companies are making use of the scoring system where based upon your personal information, you get a score and based on that score you get your personalized catalog of term insurance plans or health insurance plans or whatever you’re looking for. Every insurance company has a different criterion for processing personal information and thus, they have different premiums.

Type of Coverage

The best way to understand the type of coverage is to consider it as an a-la-carte system where the more coverage you include in your insurance plan, higher is the premium that you would have to pay for that coverage. For example, you want to buy a term insurance plan, now the if you increase the policy period, then you would have to pay a higher premium accordingly.

Amount of coverage

one of the insurance terms that is known to almost everybody is the sum-assure or the cover. It is one of the first things that comes to mind whenever the topic of insurance comes up. The relationship of sum-assure and premiums is quite straightforward, the higher is your sum-assure, higher would be the premium you will be paying. Now, this can be done in exactly a couple of ways both of which are mentioned below.

  • The first one would be the straightforward one according to which higher the amount of cover, more is the premium without any adjustment in other aspects of the insurance coverage.
  • This one is quite a workaround for getting a higher cover without having to pay more premiums. Let us understand it with respect to a car insurance, making your excess higher would get you lower premiums without decreasing your cover. Excess is the lump sum amount that you pay while purchasing a car insurance. now, every type of insurance has something related to excess and thus, this method works for every insurance in the market.

Competition

Fortunately, this point has nothing to do with you yet the end benefits are for the consumers only. Every insurance company wants to attract most of the customers and thus, in order to do this, the companies keep the premiums of their plans competitively priced. Not only this, another interesting facet of competitive pricing is that it needs to be initiated just by one company and then, many other companies will bring the prices of their plans down in fear of losing their customers.

Who calculates the Premium?

We hope that all of you understand that nobody but the insurance companies know exactly how the premiums are calculated and therefore, in this section, some basic information about who are the people who decided the premiums and how do they do so would be mentioned.

Actuaries is the position in the insurance companies, people assigned on which are responsible for determining the premium for insurance plans ranging from the basic ones like term insurance plans to the not so popular yet complex ones like D&O liability insurance. They are responsible for performing risk assessment and eventually, financing out the probability of a claim to be made considering a lot of factors.

Types of Insurance premiums

Based upon the premium paid

While purchasing an insurance for whatever purpose, you get a choice for whether you want to pay a fixed premium till the end of your policy’s maturity period or you want some flexibility. Based on this, the following are the two types of insurance premiums.

Level Premium

This is the basic form of premium where the policyholder has to make fixed payments till the end of policy maturity period. There is nothing much in this to learn.

Flexible Premium

This is where it gets a bit complicated. If you choose flexible premiums, then you get the option to make certain changes in your insurance policy in the future like you can change the face amount to increase the number of people covered under a term insurance plan or you can increase the sum assured. According to the changes made in the policy, changes in the premium amount to be paid will get implemented.

Based upon the insurance purchased

One might assume that this section is going to include different types of insurance and nothing related to premium. Well, it could have been done that way but to keep the relevance to the topic preserved, under insurances, we’ll list out the prominent factors that determine the premiums. So let’s get started:

Life Insurance premiums

Life insurance offers cover against the death of the policyholder or any mishap to the family of the policyholder along with some saving benefits depending upon the type of life insurance chosen. The factors that affect the premiums paid for life insurance include the age of the insured, his annual income, assets owned, debts, health information etc. the simplest form of life insurance is the term insurance plans because it doesn’t include any saving benefit at all and provide cover for only the policy duration.

Health Insurance Premiums

Health insurance provides cover for the medical expenses, hospitalization, illness treatment, surgeries of the insured. It even includes regular free medical checkups. Now the factors to be considered under this insurance are pretty simple and all of them arise out of just one number that is your age. Higher is your age, more will the premium to be paid for the health plan. other factors that are important are pre-existing health conditions, family size if you are looking for a floater plan, income and the type of coverage.

Car insurance premiums

Car insurance is broadly of two types third-party and comprehensive. Third party car insurance is the basic form and is mandatory to have while the comprehensive insurance provides coverage to you and your car. Your car model, daily commute, car condition, age of the driver, Anti-theft gadgets installed in your car or not etc. one thing to keep in mind while buying a car insurance is that both the types of car insurance are important where the third party is necessary to provide you cover against an accident or damage to the third party and the comprehensive insurance provides cover for the damage to you and your car maintenance.

Travel Insurance premiums

Travel insurance provides you benefits of both the health insurance and life insurance but only when you are traveling. The factors to be considered in this case thus would be a combination of both these insurance including others like the place of travel i.e. abroad or domestic, cover to be provided, type of coverage etc.

Modes of paying your premiums

Payment of insurance premiums can be made in various modes and by the way, Mode indicates the frequency of paying the insurance premium in a year. let us look at all the different modes of payment below:

  • Monthly

For monthly premiums, the amount would be least and easy to afford on monthly basis but the downside with monthly premiums is that the insurance policy would cost you most this way.

  • Quarterly

Four payment per year, the amounts are quite affordable and the policy, in the end, would cost you lesser than the case of monthly premiums but more than the cases of both semi-annual and annual payment methods.

  • Semi-Annually

In this case, two payments will be made for premiums in a year and the cost would be more than paying annually but way less than if you go for monthly premiums. Also, the amount to be paid will be higher than both quarterly and monthly payments.

  • Annually

Under Annual payment of premiums, you would be paying only once a year but the amount would be significantly high than like monthly or quarterly payment but at the same time, the cost of the policy to the owner would be least.

So, the trend can be easily observed that higher the frequency of your premium payments, more is the cost of policy but the lesser is the amount to be paid in one installment.  

Conclusion

It’s great to see that you read it till the end. You must have had quite an interest in the topic, we guess. As we said at the start that insurance is not a topic, it is an entire subject and we have just covered one of its chapter with only slight details. We tried our best to keep your interest at the top throughout the discussion and we hope that you learned something useful. If you really learned something, then believe it, next time you will be buying an insurance no matter which a term insurance plan or a third party car insurance, you will definitely be making a wiser choice.