Important facts about your life insurance premium

Most of us are aware that premium is the amount one pays the insurance company for getting the benefits under a policy. But questions such as do you have to pay premium in advance or do you get a discount on premium or does the premium increase with age may draw a blank with most people. So, let’s try to understand some lesser known facts about life insurance premium:

What is life insurance premium?
Life insurance is a contract between the insurance company and the policyholder whereby the policyholder transfers his risk to the insurance company. Premium is the consideration that the policyholder pays the insurance company for assuming his risk.

Premium is payable in advance:
Let’s assume that Rahul has a term life policy for which he pays annually. His next due date is on 25 Dec 2017. This means that Rahul has to pay by Dec 25, 2017, for insurance coverage for the period 25 Dec 2017 – 24 Dec 2018.

Various modes available:
Life insurers offer annual, semi-annual, quarterly and monthly modes for premium payment. Monthly modes are generally offered only under ECS or other auto-debit facilities.

Discount on premium:
Discount on premium is available in case the policy is purchased online.

Payment mode impacts premium amount:
In term plans, it is assumed that the premium will be paid on an annual basis in advance (as explained above). In case the annual premium is received at one go, the company can invest it for a longer duration and generate more returns than if it is received in a monthly mode.
However, from a customer perspective, modes such as Semi-Annual, Quarterly and Monthly are also allowed. Here the modal factor comes into play. It basically compensates the company for receiving premiums in a staggered way which affects the returns they would have generated by investing a lumpsum amount. The modal factor is usually a percentage of the annual premium.

For eg: Suresh’s policy has an annual mode with premium of Rs 12,000/-. In case he changes the mode to Monthly then the monthly premium payable will not be 12000/12 = Rs 1000/-. It will be 12,000*0.087 i.e Rs 1044/- (0.087 is considered as the modal factor for monthly premium here as an example. Semi-annual and Quarterly modes will have different modal factors and it will be mentioned in the policy document). In short, a change in payment mode from lower frequency (or lesser frequency) of payment to higher frequency of payment will see a rise in the premium payable.

Level Premium:
Life Insurance is a long-term contract. With advancing age of the life insured, the risk on the life insurance company also increases. However, this does not result in the company increasing the premium every year as it is administratively prohibitive. Also increasing premiums every year may make it unaffordable for many and they may let their policy lapse. Unhealthy people may continue premium payment thereby increasing the risk to the insurance company. Due to these issues, the insurance companies average out the premium chargeable over the entire policy tenure and the average premium is charged as a level premium throughout the policy tenure. 

This is applicable for term plans. The advantage to the insured is that he pays the same premium throughout the policy tenure and especially those who take policies early in life are immensely benefitted by the level premium concept.

Extra premium:
Raj is a bungee jumping trainer. He applies for a life insurance policy. The insurance company asks him to pay an additional premium over and above the standard premium applicable for his age due to his profession which puts his life at more risk as compared to other professions. This is called extra premium. It is charged by the insurance company when they assume an extra risk on the life insured’s life by way of lifestyle, pre-existing ailments, hazardous professions, hobbies etc.

Policy lapses on non-payment of premium:
Incase the premium is not paid on the due date or within the grace period the policy lapses. The grace period is usually 30 days from the due date. However, for more frequent modes life Monthly it is usually 15 days. A lapsed policy can be revived as per the reinstatement guidelines of the insurance company.

Hope the information provided above has helped you gain more insight on life insurance premium.






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