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Insurance Premium - Definition & Meaning

Insurance Premium - Definition & Meaning
February 16, 2024

 

In this policy, the investment risks in the investment portfolio is borne by the policyholder

The insurance premium is the sum of money an individual or business must pay for an insurance policy. The amount of insurance premium that is paid out by the policyholder to the insurance company depends on a variety of factors.

What is Insurance Premium?

Insurance premium is a specified amount stipulated by the insurance company, which the insured individual should periodically pay to maintain the actual coverage of insurance.

As a process, insurance companies examine the type of coverage, the likelihood of a claim being made, the area where the policyholder lives, his employment, his habits (smoking for instance), his medical condition (diabetes, heart ailments) among other factors.

Insurance companies employ actuaries for the purpose of determining, for example, the likelihood sof a claim being for a heart attack or cancer or another critical illness by individuals across various age groups and lifestyles. The greater the risk associated with an event / claim, the more expensive the insurance premium will be.

Insurance companies offer policyholders a number of options when it comes to paying insurance premium. Policyholders can generally pay the insurance premium in installments, for example monthly or semi-annual payments, or they can even pay the entire amount upfront before coverage starts.

In case of non-life insurance, like auto insurance for instance, the annual insurance may be reduced following a no-claim year. Conversely, the premium can rise following a claim year.

How Does Insurance Premium Work?

By paying insurance premiums, policyholders ensure the continuity and validity of their insurance policies. The premiums paid on life insurance policy represent a financial commitment made by individuals to ensure their families are taken care of in the event of their death. The assured sum, or coverage amount, must be aligned with the policyholder's specific needs in order to determine the assured sum. Premiums are calculated based on various factors related to the insured individual, including age, health, occupation, and lifestyle. Understanding these factors and exploring insurance discounts is crucial for policyholders. For beneficiaries of the policy, timely and consistent premium payments maintain the policy's effectiveness, protecting their financial futures.

How is the Insurance Premium Calculated?

The insurance premium is based on the level of risk associated with following factors 

  • Age

  • Early life insurance coverage is often recommended to reduce the impact of high life insurance premiums. Insurers use age to calculate coverage amounts, so securing a policy at a younger age can potentially result in lower premium rates.

  • Gender

  • Insurers pay particular attention to the gender of insured individuals since research indicates that women tend to live longer than men on average. Due to their longer life expectancy, women may experience slightly lower life insurance premiums.

  • Habits

  • Life insurance premiums are determined by the individual's risk of developing health conditions, which can be impacted by certain habits, like smoking and drinking.

  • Medical History

  • Considering the medical history of the insured is crucial because it informs the insurer of the risks associated with his or her life. The insurance premium may be higher if there is a family history of critical illnesses such as cancer and heart disease.

  • Profession

  • Another factor affecting your insurance premium is the nature of your occupation. It may be necessary to pay a higher premium for those in high-risk professions, such as the mining industry or oil and gas sector.

  • Hobbies

  • A life insurance premium can rise if your hobbies involve activities that can endanger your life, such as adventure sports.

  • Lifestyle Preferences

  • Insurers may set higher insurance premiums for those who regularly engage in risk-taking activities like mountain climbing, racing, and similar pursuits. 

  • Marital Status & Dependents

  • Depending on your marital status and number of dependents, you may be eligible for maximum life insurance coverage and premium payment capacity. An insurer might reduce the premium and the sum assured cover in cases with numerous dependents.

  • Residential Location

  • Your residential location plays a significant role in your insurance premiums, as crime rates and environmental risks vary by area.

  • Income Level

  • It is often assumed that higher incomes are associated with higher coverage and a lower perceived financial risk, so insurance premiums are often influenced by your income level.

  • Policy Term & Premium Payment Term

  • It is not possible to have a longer premium payment term (PPT) than a longer policy term (PT). You will pay a lower premium if your PT is lower.

  • Loans & Liabilities

  • During the financial underwriting process, you must evaluate loans and liabilities. It is the insurer's goal to ensure that you are committed to making regular premium payments. Nevertheless, if you have multiple ongoing loans, the insurer may request a lower Premium Payment Term (PPT) or reduced premium amount to mitigate the risk of policy lapse.

  • Sum Assured Amount

  • The higher the sum assured, the higher the premium, but if the premiums are paid in full, it is possible to get discounts on the premiums. A higher sum assured indicates an increase in coverage, which means a higher premium.

  • International Travel Record

  • When calculating your insurance premium, factors such as frequency and destinations may be taken into account, since extensive travel to high-risk regions may affect your overall coverage costs.

Types of Insurance Premiums

There are several types of insurance premium, listed below:

  • Life insurance premiums

  • Factors such as age, health status, and medical history play an important role in determining life insurance premiums. Whether a policyholder smokes or consumes alcohol is carefully assessed by insurers, as these habits can have a significant impact on their risk profile. In addition, lifestyle choices, occupations, and hobbies involving higher risks may also be considered when calculating premiums. Life insurance applicants must submit accurate information throughout the underwriting process to avoid discrepancies that would impact the cost and eligibility of their coverage. The insurance company calculates the premium based on statistical models and actuarial data, which ensure that it accurately reflects the potential financial liability they may face.

  • Health Insurance Premiums

  • Several employers cover the costs of health insurance premium for their employees, eliminating the need for them to pay out of pocket. A lower premium means higher out-of-pocket healthcare expenses in the absence of employer-provided coverage. Selecting a health insurance plan must take into consideration premium costs and coverage comprehensiveness. A person's overall financial impact of health insurance is affected by factors such as deductibles, copayments, and coverage limits. It is also important for individuals to assess their specific needs and budget constraints when choosing a health insurance plan because lifestyle choices, pre-existing conditions, and age may also affect health insurance premiums.

  • Auto Insurance Premiums

  • A car insurance provider assesses your driving history, taking into account factors such as violations, parking tickets, license suspensions, and accidents. A driver with a clean record will pay a lower premium than one with a history of accidents and violations.

  • Homeowners insurance premiums

  • Homeowners' insurance premiums are affected by factors such as age, size, value, and location. Storm-prone regions, such as areas where hurricanes or tornadoes are common, usually have higher insurance rates.

  • Renters Insurance Premiums

  • A renter's insurance premium depends on factors like the amount of coverage, the location, and the history of claims. At a cost that fits their budget, renters can customise the policy to cover their personal belongings and provide liability protection.

Factors to Consider While Buying an Insurance Premium Policy?

When buying an insurance policy, you need to consider the following factors:

  • Current Life Stage

  • Consider your current life stage when purchasing a premium insurance policy. Singlehood, marriage, or parenthood all require different types of coverage. It is important to make sure the policy fits your current and future needs.

  • Financial Requirements

  • Consider all aspects of your financial requirements. Calculate the coverage amount you need to cover your dependents and settle any outstanding debts. In order to meet your financial goals and ensure the future of your family, you need to balance affordability and adequate coverage.

  • Insurance premium

  • Choose a premium that fits your budget and is affordable. Choosing the payment frequency that fits your financial circumstances can be as easy as selecting the option that matches your yearly, half-yearly, or monthly payment frequency.

  • Duration of the Policy term

  • When buying insurance, consider the terms of the policy carefully. Ensure that the term matches your long-term financial goals, such as mortgage payments, children's education, or retirement. If you choose a term that reflects your specific needs, you will ensure adequate coverage for all critical stages of your life.

  • Rider

  • There are several types of riders, each of which offers supplementary benefits beyond the policy's core coverage. You can add optional insurance coverages like critical illness benefits, accidental death benefits, or disability benefits to your base policy for an additional cost, enhancing your overall protection.

  • Long-term goals

  • Depending on your long-term goals, you may have a variety of insurance needs. For a combination of protection and savings, consider an endowment plan. A Unit-Linked Insurance Plan (ULIP) can provide investment opportunities, while term insurance can provide substantial life insurance coverage at an affordable cost.

  • Claim Settlement Ratio

  • You should make sure the claims process is easy and smooth for your beneficiaries so that they can rest assured. Consider an insurer known for a fast and hassle-free claims process by checking out their track record. By assessing the insurer's claim settlement ratio, you can gain insight into their efficiency.

  • Terms and Conditions

  • A policy term refers to the duration of coverage offered by the insurance company to the insured. Consider your age and the needs of your dependent family members when choosing a policy term. For instance, those with young children may prefer a policy that extends coverage until they reach financial independence.

What are the Key Factors Affecting Insurance Premiums?

Many factors influence insurance premiums, such as the type of coverage selected, the age of the policyholder, location, claims history, and health and safety considerations. The premium for a particular insurance type may be adjusted post-policy term depending on the risk associated with that type of insurance. Premiums can also change due to changes in coverage amounts.

What Determines an Insurance Premium?

  • Type of Insurance Coverage:

    The cost of insurance premium is lower for less coverage, while the cost is higher for more extensive coverage.

  • Amount of Insurance Coverage (and any past claims made):

    The amount of insurance coverage selected by the policyholder affects the insurance premium significantly. It is also possible that a history of past claims could influence the premium, with a higher frequency of claims potentially leading to higher costs.

  • Insurance History:

    Premiums are determined in part by the policyholder's insurance history. Positive histories, with no frequent claims or lapses, can reduce premiums since they reflect a lower perceived risk for the insurer. Additionally, high premiums may result from a history of many claims.

  • Personal Information:

    Insurers consider a number of factors in determining whether to insure an individual, including age, place of residence, marital status, lifestyle, medical history, credit history, driving record, and employment status.

How to Pay Insurance Premiums?

There are several ways to pay insurance premium, including:

  1. Monthly or Annually: Many insurers allow monthly or annual payments for premiums. In some cases, annual payments may be discounted, while monthly payments provide flexibility.

  2. Electronic Funds Transfer (EFT): Make sure that the premium is automatically debited from your bank account using an EFT arrangement. By doing this, timely payments are made without the need for manual intervention.

  3. Credit Card Payments: Several insurance companies offer credit card payment options, offering convenience and potential rewards.

  4. Online Payments: Online premium payments can be made securely and conveniently through the insurer's website. Payments made this way are usually confirmed instantly.

  5. Check or Money Order: Many insurers still accept checks and money orders, but they may take longer to process.

  6. Payroll Deduction: A policyholder's paycheck may be deducted directly from his or her account for certain types of insurance, such as employer-sponsored plans.

It is important to consider factors such as convenience, cost, and any possible discounts offered for specific payment methods when choosing a method of payment. Ensure that payments are made on time to maintain continuous coverage.

What does an Insurance Company do with the Premiums?

By allocating the premiums they collect for different purposes, insurance companies are able to ensure financial protection for policyholders. These funds not only contribute to covering potential claims, but they also help insurers generate income, cover operational costs, and build reserves. This systematic approach allows insurance companies to maintain financial stability and fulfill their commitments to policyholders, while also aiming to achieve a profit margin by collecting more in premiums than paying out in claims and expenses.

What is an Actuary?

The role of an actuary involves evaluating and overseeing the risks associated with financial investments, insurance policies, and other ventures involving potential risks. Using probability, economics, and computer science, actuaries analyse specific financial situations. As actuaries, many work for insurance companies, where their expertise in risk management is particularly valuable to determine risk levels and calculate premium rates.

FAQs on Insurance Premium 

Q: What is premium in insurance?

For insurance coverage, the premium is the amount paid to the insurance company by policyholders. The regular payment ensures that the policy remains in force and provides financial protection as specified in the policy.

Q: What are the types of insurance premiums?

Premiums can either be fixed or flexible and can be paid monthly, quarterly, half-yearly, annually, or in one payment. A fixed premium remains constant throughout the duration of the policy, while a flexible premium varies based on the conditions of the policy.

Q: How is insurance premium calculated?

Insurance premium is determined by several factors, including an insured's age, health, coverage amount, and risk profile. Premiums are determined by actuarial data and statistical models.

Q: Can the insurance premium change during the policy tenure?

No, throughout the duration of the policy, the insurance premium remains unchanged from the time of purchase.

Q: Is insurance premium paid yearly or monthly?

Depending on the insurance company's options, policyholders can choose between yearly, half-yearly, quarterly, or monthly premium payments.

Q: Is any grace period available to claim for payment of the premium?

A grace period is usually provided if the insurance premium is not paid by the due date. In this period, policyholders can still take advantage of the benefits of the insurance policy. The length of the grace period depends on the frequency of premium payments.

Q: What are the options available for paying the insurance premium online?

Payment methods for insurance premiums include debit cards, credit cards, net banking, mobile banking, and UPI, providing flexibility in payment.

Q: What happens if I fail to pay the insurance premium on time?

Policyholders are given a grace period after the due date to pay their insurance premium. This period allows them to continue receiving the benefits of the policy, but if the premium remains unpaid, the policy may lapse and coverage will end.

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ARN - ED/02/24/8602

Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Author Profile Written By:
Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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HDFC LIFE IS A TRUSTED LIFE INSURANCE PARTNER

We at HDFC Life are committed to offer innovative products and services that enable individuals live a ‘Life of Pride’. For over two decades we have been providing life insurance plans - protection, pension, savings, investment, annuity and health.

The Unit Linked Insurance products do not offer any liquidity during the first five years of the contract. The policyholders will not be able to surrender or withdraw the monies invested in Unit Linked Insurance Products completely or partially till the end of fifth year. 

Unit Linked Life Insurance products are different from the traditional insurance products and are subject to the risk factors. The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions. HDFC Life Insurance Company Limited is only the name of the Insurance Company, The name of the company, name of the contract does not in any way indicate the quality of the contract, its future prospects or returns. Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document of the insurer. The various funds offered under this contract are the names of the funds and do not in any way indicate the quality of these plans, their future prospects and returns.