To begin with, insurance premium is the money charged by the insurer to extend coverage to your life. Technically speaking, life can't be insured. It's an assurance given by the insurance company to the customer that a certain amount of money will be paid to the family after his/her death or at the end of the term for which the customer is insured; known as term insurance.
The premium varies between insurers and it's advisable to shop around before you sign on the dotted lines of your insurance policy. It's important to know that the premium quoted by the insurance could be marginally lower than the actual premium charged, largely because of government taxes and levies.
The amount of premium charged by the insurance company is determined via mathematical and statistical calculations by the underwriting department.
How is the premium calculated?Before your application is accepted, the insurance company will ask you several questions to determine the amount of risk you pose for them i.e. how likely they will have to pay you off. Each company has its own sets of underwriting criteria for determining whether or not to issue a policy and at what price. This is a major reason why insurance premiums vary between companies.
Factors that affect your premiumInsurers will consider several factors while calculating your life insurance premium. These are as follows.
Age: The older you are while applying for a life insurance policy, the higher will be your premium, as you will be a greater risk for the insurer. Getting a life insurance early in life is important, particularly if you have several dependants or a young family. These days, however, there are quite a few life insurance options available for senior citizens.
Guaranteed payouts: A whole life insurance policy will pay whenever the policyholder dies. But the more popular endowment policy pays out if the policyholder dies within the period of insurance or at the end of the term. Whole life policies are usually more expensive.
Marital status: Your marital status will be considered while processing your insurance policy application. You may want to go for a joint life insurance, in case you are married, or are in a civil partnership, or if you cohabit with your partner.
Number of dependents: It's one of the most important factors while determining your premium. The numbers of persons relying on your income for sustenance are your dependents. In most cases they are your family members like spouse and children, and dependent parents. The more number of dependents you have, the higher will be your premium. This is because the insurance will have to extend coverage to a greater number of people. The policy will help your dependents continue living the life they were accustomed to all these years. Besides, if you have young children, a joint policy will give them financial protection until they reach the stage of higher education. A joint policy with a spouse, however, works on first-death basis. The payout is made whenever one of the partners dies.
Occupation: This is another major determinant while calculating life insurance premium. Some occupations or professions are considered more risky than others. These include pilots, soldiers, offshore oil and gas industry workers, fishermen, people working in firecrackers industry and similar others. Such people have to pay a higher premium because of their work conditions than others who work in a typical office environment.
Outstanding debts: All the outstanding debts you have including mortgages, house building and personal loans, will be considered while deciding your premium.
Personal medical history: Whether your medical history will have an impact on the premium you have to pay, will depend on the severity of previous illnesses you had or are currently suffering from. Long-term medical conditions like heart ailments, stroke, diabetes, and chronic respiratory problems, are likely to increase your insurance premium by a great extent. Also, if you have suffered from cancer in the past, most insurance companies are unlikely to offer you a policy, until you have been in remission for a minimum of five years.
Family medical history: Your family medical history may or may not be considered while calculating the premium. It depends on the severity of the condition of the dependent persons who you want to cover, their age and stage of ailment. If you have a family history in critical illness, like cancer, it will affect your premium.
Purpose: The reason for which you want to take the insurance policy is considered to determine the premium. You may want it to cover a young family or clear a mortgage.
Income: The insurance company will ask for your proof of income which is usually the latest salary slip or income tax returns for the last three years. The insurer wants to know how realistically you will be able to pay your premium. Withholding or providing false information regarding your income may void your application.
Smoking and tobacco use: Smoking and chewing tobacco has a direct link with life-threatening diseases like throat, lung and oral cancer. People exposed to tobacco statistically live shorter and are charged a higher premium. Insurance companies will consider you a smoker if you have been smoking anytime in the last one year. Tobacco products include cigarettes, cigars, bidi, nicotine patches, khaini, gutka, snuff, and all forms of smoking and chewing tobacco. Insurers usually don't distinguish between the number of cigarettes you smoke, or packets of gutka you chew. Whether you smoke one or 20 cigarettes a day, you will be considered a smoker.
Gender: The battle of the sexes extends to the life insurance section as well. Women usually live longer than men and their insurance premiums are marginally lower.
Tenure: A logical factor to determine the life insurance premium. The insurance company has to take a greater risk if they have to cover you for a longer period of time. Short-term insurance policies are more expensive whereas long-term plans have more payments.
Remember the simple thumb rule to take an insurance policy: start early. You'll enjoy lower premiums for more years of coverage.
