Buying life insurance is vital to secure the future of you and your dependents financially. It acts as a safeguard in case of an unforeseen event in your family. However, before you consider buying insurance, you should have a general idea about a life insurance premium.
Life Insurance Premium
A life insurance premium is the amount of money that you need to pay to your insurance firm for providing you insurance.
In addition to providing insurance cover, the insurance firm can use the premium amount for
- Investing
Insurance firms can use a portion of the premium amounts of their policyholders to invest in various financial instruments. This enhances their chances of getting better returns allowing them to keep their insurance product affordable.
- Covering their liabilities
Insurance firms have some regular liabilities, such as paying death benefits or maturity benefits to their policyholders or the nominees. Insurance companies use the premiums collected from their policyholders to maintain liquidity to meet such liabilities.
- Business Expense
Like any other business, insurance firms need to take care of office rent, the salary of staff, regulatory compliance etc. Such business expenses are met through the insurance premium.
How is Insurance Premium Determined?
The insurance premium amount is never fixed. It can vary, sometimes significantly, from one person to another depending upon various determining factors such as
- The amount of insurance coverage offered
- The age of the person to be insured
- The area where the person resides
- Nature of employment – Some hazardous jobs like being in police or armed forces can attract a higher premium
- Medical history such as heart ailments, serious illnesses, etc.
- Lifestyle habits such as smoking, drinking, or eating habits
- Type of coverage – The insurance premium for a term plan is much lower than a whole life plan as there are no survival benefits in term plans.
- Income
- Marital Status
- Gender
There can be many other deciding factors depending upon the insurance firm. Alternatively, reputed insurance firms provide an online premium calculator on their website. You can use the calculator to know how much premium you have to pay.
Insurance Premium Payment
A policyholder can pay the insurance premium in the form of cash or online. Except for the annuity plans, where you have to pay a lump sum premium while buying the policy, most insurance plans offer flexibility in terms of paying the premium.
Therefore, you can choose to pay the premium of your life insurance plan on a monthly, quarterly, semi-annually, or yearly basis.
Defaulting on Premium Payment
If you fail to pay your premium by the due date, your insurance plan will enter the grace period. Grace period is the extra time given to the policyholder, after missing premium payment, for clearing the due amount. If you manage to pay the premium within the grace period, your policy will continue.
However, if you fail to pay your premium even during the grace period, your insurance policy will lapse, and the insurer will discontinue all the policy benefits.
A life insurance premium is the backbone of the entire insurance ecosystem comprising the policyholder and the insurance firm. Therefore, a policyholder should understand the terms and conditions related to paying the insurance premium before signing the dotted lines.
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