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Why is the Premium Amount for Term Insurance so Low?

Term insurance offers a death benefit payout if the policyholder passes instead of any maturity benefits, making it a low-cost insurance option.

  • 7,098 Views | Updated on: Jan 02, 2024

Life is uncertain, and an unfortunate event may leave your family in financial jeopardy if you do not procure insurance coverage. Traditional life insurance plans include money-back and endowment policies. These plans provide the policy benefits to your beneficiary in case of an unfortunate event. Moreover, these plans offer a maturity benefit for survival. However, traditional life insurance plans can be expensive.

Key Takeaways

  • Term insurance is a cost-effective way to protect your loved ones financially.
  • It provides coverage for a specific period, allowing individuals to tailor their insurance to their needs.
  • The premium amount is influenced by factors like policy duration, healthy lifestyle, and the insurance company’s risk assessment.
  • Ways to reduce term insurance premiums include buying at a young age, choosing a longer policy term, opting for annual premiums, and avoiding unnecessary riders.
  • Term insurance is a popular choice for many people due to its simplicity, affordability, and flexibility.

Term insurance is a popular form of life insurance that offers a straightforward and cost-effective way to protect your loved ones financially. It is a cheaper and more affordable alternative to avail of insurance coverage. It will benefit your loved ones if something untoward happens to you during the policy duration. Low premium term insurance can be the answer for emergency financial situations in life.

Term insurance has a few key features that make it an attractive choice for many people. Firstly, it offers a death benefit payout to the beneficiary if the policyholder passes away during the policy term. Secondly, it typically has lower premiums than other life insurance types. Lastly, term insurance provides coverage for a specific period, which allows individuals to tailor their insurance to their specific needs.

Reason for Lower Premiums of Term Insurance

One common question that arises when considering term insurance is why the premium amount for this type of coverage is so low compared to other types of life insurance policies. Here are four reasons why the term insurance premium is lower:

Lesser Bifurcations

When you choose investment-based insurance plans, there are more bifurcations. The total premium on such policies is used towards administrative charges, mortality costs, and investments. Therefore, the total cost of the policy is higher. In comparison, the low premium on a term insurance plan is bifurcated only between the mortality charges and the administrative costs.

No Maturity Benefits

Most traditional life insurance plans offer maturity benefits if you survive the policy duration. In addition to life cover, such policies provide investment returns too. On the other hand, a term policy is a low-cost insurance option because it does not provide any maturity benefits. The policy benefits are paid to your family members only if an untoward incident occurs during the tenure of the term plan.

Policy Duration

A regular term insurance policy offers coverage for a specific period. The total policy duration also impacts the premium amount. The relationship between policy duration and premium is directly proportional. This means that as the duration increases, the premium amount increases and vice versa.

Healthy Lifestyle/ Low Risk

Most insurance companies may ask you to undergo medical tests when you apply for a term plan. Additionally, you need to provide information about your habits, such as smoking or alcohol consumption. If you follow a healthy lifestyle and do not have any medical conditions, the insurance companies perceive you as low risk. This means the possibility of you filing a claim against the policy is lesser. Therefore, the insurer can offer you low-premium insurance coverage.

Factors Influencing Term Insurance Premium

Term insurance cost is affected by several factors:

Insurance Company’s Risk Assessment

Insurance companies assess the risk associated with each individual policyholder, which uses a variety of factors, such as age, health, and lifestyle habits, to evaluate the likelihood of a policyholder filing a claim. For instance, if you are a non-smoker, then your premium would be lower than a policyholder who is a smoker. Since term insurance provides coverage for a specific period, insurance companies can better estimate the risk during that period, allowing them to offer lower premiums.

Policyholder’s Age and Health

The age and health of the policyholder play a significant role in determining the premium amount. Younger individuals tend to have fewer health issues and a longer life expectancy, which makes them less risky to insure. Additionally, individuals in good health are less likely to claim the terms of the policy. As a result, insurance companies can offer lower premiums to younger and healthier policyholders.

Term Length and Coverage Amount

The length of the term and the coverage amount also affect the premium amount. Shorter terms and lower coverage amounts generally have lower premiums, implying a lower risk for the insurance company. Policyholders who choose longer terms or higher coverage amounts may have higher premiums due to the increased risk and potential claims during that extended period.

Ways to Reduce Premium for Term Policy

The insurance industry has seen several changes during the last few years. You do not want to avail of a policy for a higher premium and then later find it difficult to renew or maintain it. Therefore, some ways to reduce the premium for a term policy are:

Buy Term Insurance at a Young Age

The younger you are when you buy term insurance, the lower your premium will be. This is because younger people are generally healthier and less likely to file a claim.

Choose a Longer Policy Term

The longer the policy term, the lower the premium will be. This is because the insurance company is spreading the risk of you dying over a longer period of time.

Get a Higher Deductible

A deductible is the amount of money you must pay out of pocket before your insurance company starts paying for your claims. The higher the deductible, the lower your premium will be.

Shop Around for the Best Rates

Different insurance companies offer different rates for term insurance. It is important to shop around and compare rates from multiple companies before you buy a policy.

Opt for Term Plans with Annual Premium Payments

Annual premium payments are generally cheaper than monthly or quarterly payments. This is because the insurance company can save money on administrative costs.

Avoid Unnecessary Riders

Riders are optional add-ons to term insurance policies that can provide additional benefits. However, riders can also increase your premium. Only choose riders that you really need.

Review your Policy Annually

Your needs may change over time, so reviewing your term insurance policy annually is important to ensure you have the right coverage at the best possible price.

Way Forward

The low premium amount for term insurance can be attributed to several key factors. The limited coverage and duration and the absence of cash value and investment components allow insurance companies to offer affordable premiums. Additionally, the underwriting process and risk assessment significantly determine the premium amount, favoring younger and healthier policyholders.

Before you buy an insurance policy, it is important to understand the coverage required. An online term insurance calculator can help you determine adequate coverage. It is essential to carefully consider your specific needs and circumstances before making a decision about term insurance or any other type of life insurance policy.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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