What Is Premium In Life Insurance? How much is a life insurance premium? How to calculate life insurance premiums? Below, we’re explaining everything you need to know about life insurance premiums.
What Is Premium In Life Insurance?
A premium in life insurance is a payment made to the life insurance company, to pay for a life insurance policy. The premium can also contribute to growing the cash value of a permanent type of life insurance. This term is also applied to payments remitted for annuity contracts both fixed and variable.
Premium payments are required to be made to the insurance company for a life insurance policy, otherwise, the policy will lapse. There are many ways that premium payments are structured depending upon the type of life insurance that it is paying towards. Premiums payments can be paid once, last for a few years, be flexible in timing and amount, or be level for the entire lifetime.
Paying insurance premiums
There are several options offered in terms of premium payment against your policy. Policyholders can usually pay the insurance premium in installments on a monthly, quarterly, half-yearly or annually. This premium payment frequency is called the Premium Payment Mode.
Then there is a Premium Payment Term, which determines the duration for which the premium needs to be paid, or number of installments. For the iSelect Star Term Plan, besides payment throughout the duration of the policy, you can choose a single bullet payment for entire policy duration or opt to pay for a limited duration of 5/10/15/20/25 years.
In addition, the plan also lets you choose a Limited Premium Payment Term Option, wherein you pay only during your working years, that is till you turn 60 years old, while the insurance cover continues to run even after that.
Failure to pay the premiums
When the policyholder fails to pay a premium by its due date, it causes the life insurance policy to go into a grace period. Grace period is the extra time given to your after a missed premium payment, before the policy finally goes into a lapse. If no premium is payed even during the grace period, the life insurance policy will lapse, causing the policy benefits to discontinue.
Therefore, a term life insurance premiums must always be made by the due date or the policy may lapse.
Reasons you may have to pay a higher premium:
If you are someone looking to buy a life insurance plan, you may be curious about what factors will be affect your insurance premium. As a rule, the earlier you buy a life insurance policy, the lower the premiums you pay. In addition, you may also be offered a better coverage duration and benefits.
Lifestyle – Lifestyle habits like smoking and drinking are linked to higher risk of diseases, which might require you to pay higher life insurance premiums. So, adapting to a healthier lifestyle may not only keep you safe in the long run, but also get you better rates with insurance companies.
Following are the major factors that may affect your premium amount to increase or decrease –
Other factors for lower premiums:
When buying a policy, the policy term and the sum assured you choose will also determine the premium amount. However, this should not stop you from choosing the adequate amount to be given to your family in your absence. Similarly, the term of the policy must be subjective to your budget and capabilities.
Buying a life insurance online can also save you some amount on your premiums. Most online life insurance policies offer great discounts compared to offline plans, as they cut the paperwork cost and agent’s commission.
How to calculate life insurance premiums
If you’ve compared a few life insurance quotes, you’re probably wondering why each one is different. Life insurance is about risk. It might sound a little morbid, but life insurers are trying to figure out how likely you are to die. Each insurer uses their own data to calculate your level of risk. The way insurers calculate risk is unique to each company.
There are a few different factors that go into the calculation. First, there are personal factors. That’s things like your age, medical history, gender and occupation. If you’re older, or have a history of illness, it will push your premium up. If you start the policy when you’re young and healthy, it’ll cost less.
Then there’s the type of cover you want. You could choose term cover. That’s where you’re insured for a fixed number of years. Or there’s whole life insurance, where you get a payout whenever you die. Whole life insurance will cost more because the insurer will always have to pay at some point.
It also depends on how much cover you want or need. People with big debts, such as mortgages, would need a bigger payout if they died. So, the insurer will charge higher premiums. But if you’d paid your mortgage off, your loved ones wouldn’t need so much money to get by. This would make your premiums lower.
Do life insurance premiums increase every year?
It depends on your policy. If you have a guaranteed premium life insurance policy, you’ll pay the exact same amount till the policy ends. But if you have a reviewable policy the insurer has the right to increase your annual premiums.
Usually, whole life insurance policies are reviewable. When you’re younger, they will usually go up roughly by 5-10% each year. As you get older, they can go up by 10% or more.
If you have a term life insurance policy, you can choose between a guaranteed premium or a reviewable policy. The reviewable policy will usually be less expensive to start. But, by the end, you could be paying a lot more each month.
How to Reduce Your Premium Payments
There are ways to reduce your premium payments, depending upon the type of policy that you have and want. Here are some of the best ways to lower your payments:
- Switch from permanent life insurance to term insurance. Term life insurance is the lowest priced form of life insurance.
- Reduce your face amount. Most life insurance companies have no problem doing this and premiums will be reduced roughly proportionally.
- Compare quotes on new policies to see if you can lower your costs. Life insurance prices generally drop over time, but once your policy is issued premium payments are often level.
- Change dividend options on a whole life policy. You can direct dividends to offset premium payments. Eventually, the dividend may pay the entire premium.
There are other ways to lower premium amounts in addition to these, but they depend on the exact type of policy that you own. Please check with your life insurance agent for the best ways, given your specific situation.