Life insurance is a whole new world of terminologies and verbiage we hardly get to hear in our everyday lives. When buying a life insurance policy, words like beneficiary, premiums, riders and underwriting come up frequently and start running together only in a short while.
Getting acquainted with these life insurance terms requires patience, but there are some words you get extra familiar with, for instance, premium. ‘Premium’ is repetitive and important because it is everything to do with you as a policyholder. You’ll have to pay premiums in order to keep your policy going.
Moreover, learning about how premiums in life insurance policies work is the key to finding the right coverage for your specific needs, without putting your monthly budget at risk.
What is Life Insurance Premium?
Insurance premium refers to a specific amount to be paid periodically by the insured individual to maintain their insurance coverage, as calculated by the insurance company. For deciding the premium amount, an insurance company examines the type of coverage being opted, the policyholder lifestyle and health conditions, and the likelihood of a claim being made, among other factors.
For the purpose of accurate analysis of a person’s life and insurance premium calculation, companies employ actuaries. They are responsible for analyzing the risks associated with an event or claim, and then greater the risk, higher will be the insurance premium.
How to Pay Life Insurance Premiums?
There are several options offered in terms of premium payment against your life insurance 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.
What Happens if you Fail to Pay Life Insurance 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 paid 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.
What does a Life Insurance Company do with the Premiums?
The premiums you pay for your life insurance plan is utilized in various ways by a life insurance company. Some portion of your life insurance premium is used towards day-to-day business operations, while some of it goes towards paying the death claim of beneficiaries of other policyholders.
Some portion of your life insurance premium is invested in different government bonds and investment plans to get returns.
What Factors Impact the Life Insurance Premiums?
If you are someone looking to buy a life insurance plan, you may be curious about what factors will be affecting 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.
Factors Affecting Life Insurance Premiums
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 –
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.
It is always recommend that you fully understand your premium payments and the reason they are the size that they are.