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What is Insurance Premium - A Detailed Guide

  • 18th Dec 2018
  • 2,048

Buy Term Plan Now What is Insurance Premium - A Detailed Guide

When you purchase an insurance policy, the risk is assumed by the insurer. The insurance company charges a premium to assume the risk. This premium is paid periodically either monthly, quarterly, semi-annually, or annually. Some life insurance policies allow you the option of a single premium during the entire duration of the plan.

An actuary assumes the responsibility to determine the premium on different types of policies based on numerous factors. Some of these factors include your age, health conditions, existing medical illness, type of employment, and others.

What Is an Insurance Premium?

A common question that many people have is what is an insurance premium? In simple terms, it is an amount that you pay to the insurance company to ensure you receive the coverage under the plan.

The procedure to determine the insurance premium depends on the type of cover chosen and the probability of a claim being filed under the policy. Your location, lifestyle, and habits also play an important role in the determination of the term insurance premium.

Most insurance companies take the help of qualified and experienced actuaries to determine the probability of a claim being made under the policy to determine the amount of premium. If the possibility of filing the claim is more likely, you will have to pay a higher premium and vice versa.

An insurance premium is also paid for non-life plans, such as motor insurance. In case of such plans, the insurer may reduce the annual premium amount if you do not file a claim during the policy term. This is known as the No Claim Bonus (NCB), and accumulates for every year when you do not file a claim.

Factors That Determine Insurance Premium

There are various factors that play a role in deciding the premium quote and can vary from insurer to insurer. These include, but are not limited to, the following:


Your age is a crucial metric when deciding the premium quote which is why it is advised to buy an insurance policy when you are younger. As you grow older, the premium rates keep rising with a higher probability of getting health risks. At a younger age, you can avail a term plan at an affordable cost if you are healthy and do not have any lifestyle habits.


Most insurance companies use statistical data to figure out the life expectancy of the two genders. Such a factor benefits one of the gender resulting in a lower premium rate for them.


Your past and current health records help the insurer understand the history of your health. The insurance company can also ask you to undergo a medical test but if you opt out of it, a higher premium rate might be your fate. Smoking and drinking habits also play a significant role in deciding the price.

Lifestyle Habits

If you have any lifestyle habits like drinking alcohol and smoking, you have a higher probability of getting diagnosed with some illness in the future. This can lead to you getting higher premium quotes with some premium rates being double the amount of a non-smoker’s or non-drinker’s premium.

Medical Records

The medical records include the medical history of your family, aiding the insurer to understand the potential risk of you getting diagnosed with such illnesses. For example, a family history of heart problems can give rise to an increase in the premium price.


If you have a profession, like in the mining industry, which is dangerous or poses a danger to your life can affect the premium quote.

Type of Coverage

The insurer provides several options when you want to purchase a life insurance policy. You will have to pay a higher premium if you opt for a greater and comprehensive coverage. For example, if you opt for a term insurance plan with higher coverage, the premium amount is greater.

Coverage Amount

A commonly used and known term when you look for an insurance policy is the sum assured. The premium amount and the sum assured are directly proportional, which means that greater coverage entails a higher premium. However, some ways may enable you to procure more coverage at an affordable premium. One way to reduce the premium amount is to increase the excess. This is the amount that you must pay in case of a covered event occurring before the insurance company accepts your claim.


Although this factor does not directly relate to you, it benefits you in terms of a competitive premium for your insurance plan. Because insurance companies want to increase their customer base, they attract new clients through reduced premiums. Another aspect of competition is that when one insurer reduces the premium, most other insurance companies follow suit, which makes it beneficial to you.

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Who Calculates the Premium?

Insurance actuary is someone in an insurance company who analyzes the financial risk linked with a policyholder by using statistical data and mathematics. They also make sure that the insurer remains financially stable and is able to pay off the insurance claims. Hence, the actuary determines a common premium rate for various factors but does not work
on premiums for specific policyholders. The underwriter appointed by the insurer is the one who takes the premium rate table and determines the premium you will have to pay based on the factors that apply to you.

Different Types of Premiums

In addition to knowing what a term insurance premium is, it is recommended you understand the types of premiums. There are two types of premiums as listed below.

Level premium

This is a basic type of insurance premium where you pay a fixed amount during the entire policy duration. It is not complicated and is self-explanatory.

Flexible premium

This is slightly more complex. When you choose a flexible premium option, you have the choice to make certain changes to the insurance policy. You may choose to enhance the insurance coverage or increase the number of people covered under the same plan in the future. Based on the modifications you make, the premium will change.

Modes of Premium Payment

You can pay your premiums with multiple payment frequency options made available to you. This enables you to pay as per your convenience. Here are the four modes of payments:

  • Monthly Payment
  • This mode of payment allows you to pay on a monthly basis but it is observed this method leads to paying a higher price for the policy when compared with other modes.

  • Quarterly Payment
  • This mode enables you to pay four times per year and is known to be a lucrative option than the monthly method.

  • Semi-Annual Payment
  • For semi-annually mode, you will have to pay your premiums twice in a year which would consist of shelling out a higher amount when compared to the above-given methods.

  • Annual Payment

An annual payment mode can lead to a higher amount of premium that would have to be paid every year. But this method gives you a policy at a lesser cost than the other modes of payment.

When you want to understand what is a life insurance premium, you will only gain some basic understanding. This is because, in most instances, nobody except insurance companies completely comprehends the way premiums operate. The actuaries are responsible for calculating the insurance premium based on several factors. You may contact such actuaries to further understand life insurance premiums thoroughly.

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- A Consumer Education Initiative series by Kotak Life


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