Insurance is a means of availing financial protection against various risks. But the protection comes for a cost. Insurance companies pool the money from many insured individuals or entities and then use the pooled money for paying out the losses whenever an insured event takes place. The cost that you incur for availing the insurance is termed as insurance ‘premium’, which is structured based on many factors. Let’s learn about the insurance premium in detail. So, what is an insurance premium?
What is an insurance premium?
The insurance premium is the sum of money or the consideration paid by an individual or business to the insurance company in order to avail the insurance policy. Basically, premium is the amount charged by insurance companies periodically for providing the protection. Premium is structured based on various elements. Insurance premiums vary from one type of insurance to another and from one insurance company to another. Generally, insurance companies allow you to pay the premium periodically – monthly, quarterly, half-yearly and yearly. The frequency may vary depending on the terms and conditions of the insurance policy. In some cases, insurance policies can be availed for single premium payments also. Let’s how insurance premiums are calculated.
How insurance premiums can be calculated?
Insurance premiums are determined depending on various factors considered in each type of insurance plan. Premium rates may vary from one insurance company to another as the underwriting process varies from company to company. The factors that are considered for life insurance and factors that are considered for general insurance are different. Hence, the insurance premium calculation and the underwriting process vary for each type of insurance. In general, the following is the way through which premiums are determined.
- Each insurance application goes through an underwriting process
- Underwriters gather all the required information and investigate about health history, vehicle reports and medical reports and many more such data
- Collected data will be analysed by actuaries. Insurance actuaries are the professionals who analyse the financial risk or claim risk on the basis of statistics, mathematics and financial theories
- Probability of claim will be assessed by the insurance actuaries
- Depending on the claim probability insurance premium will be determined. Higher the probability of an insurance claim, higher will be your premium cost and vice versa.
Factors affecting insurance premium
Factors based on which insurance premiums are determined to vary from one insurance type to another. Insurance coverage amount and the type that you are seeking is one of the primary and common factors based on which premium is determined for any type of insurance policy.
Let’s consider life insurance policies. In life insurance plans, the premium is determined based on various factors such as coverage amount, your age, gender, smoking habit, the place where you live, lifestyle, health reports, family health history and driving record.
Premium increases with a rise in quantum of risk. For example, the premium charged on a term insurance policy purchased by 25-year-old healthy man will be reasonably lower than the premium charged for the same policy purchased by a 35-year-old man. With the increasing age, health deteriorates thus the risk of claim also rises. Certain habits like smoking and alcohol consumption that can put one’s health at risk increases the probability of a claim. Hence, smokers are charged relatively more premium than non-smokers.
Let’s consider non-life insurance policy, say motor insurance plan. Factors that affect your motor insurance premiums are geographical location, age, gender, marital status, driving record, previous claim history, vehicle type, vehicle usage and coverage chosen and many more. If you consider travel insurance plan, premiums are determined based on factors such as coverage type, age, trip duration, the destination of travel, high-risk hobbies and many more.
More the risk more is the insurance cost. For example, inexperienced drivers are charged more premium compared to experienced drivers as they pose more risk of accidents. Teenagers are considered as ‘high-risk’ category as they have no or less driving record/experience. Each factor that affects your insurance premium is weighed differently.
When it comes to renewable insurance policies (most of the general insurance policies are annually renewable), insurance companies consider the previous claims made. Premium may increases after the policy period ends. That means renewal premium could increase depending on the previous claims made. In case, providing a coverage looks riskier, then the insurance company increase the cost to provide the same type of coverage which was given earlier.
The Insurance premium is an important consideration at the time of buying any insurance policy. It’s important to buy the right and affordable insurance policy. Knowing more about the insurance premium, calculation and the factors that affect the insurance premium helps you understand the product better.
Frequently Asked Questions (FAQs)
- Can you control risk factors that affect your insurance premium?Factors such as age and gender affect the insurance premium are not under your control. However, there are many factors that influence your premium can be controlled. Practising a healthy lifestyle, building a good credit score, maintaining a good driving record and choosing the right coverage are some of the main factors that can be controlled and premiums can be reduced.
- What are the factors that affect health insurance premium?There are various factors that affect the health insurance premium. Some of the major factors that affect health insurance premium are age, gender, coverage type chosen, body mass index, usage of tobacco, pre-existing ailments, family health history, profession and place in which you live.
- How can you calculate insurance premium?For the calculation of the insurance premiums, there is an effective tool available online called ‘insurance premium calculator’. Depending on the category and type of insurance that you need, you need to provide certain basic information regarding your personal profile and coverage requirements. With the details provided, the tool calculates the premium instantly.
- How does vehicle size affect your motor insurance premium?In an accident, large cars are considered to be safer than small cars. Hence, large cars with highest safety rating come at a relatively lesser amount of premium than that of the small car with a similar rating. However, the premium is based on various other factors also.
- In a term life insurance, what happens if you discontinue premium payment?In a term insurance plan, if you discontinue your periodic premium payment, automatically policy will lapse and the cover will be ceased.