The key factors that play an important role in determining the life insurance premium payment include age, gender, health conditions, premium paying term, policy term, type of product selected
The decision to pick out a life insurance plan that works the best for you often revolves around the premium rates and its affordability. But while it is only natural that we try to save on the insurance premium payments, it must not come at the cost of the policy coverage.
If a compromise is to happen there, it would defeat the purpose of the insurance plan, which is to secure the financial future of our loved ones when we are no longer around.
Therefore, to know how you can reduce the cost without it having an effect on the benefits, we must first understand how insurers determine the premium, keeping several key factors in mind.
Premium payment depends on various factors
Life insurance is a critical tool for financial risk management. The risk assumed by every individual differs on the basis of their profiles in terms of demographic and socio-economic attributes. In simple words, a younger person has a lower mortality risk and will typically have to pay lesser than a person of older age for the same cover.
However, two people of the same age but living in different locations, with different health conditions and income earning capacity will be offered differential coverage and /or variance in premium.
Rushabh Gandhi, Dy. CEO, IndiaFirst Life Insurance said that insurers normally price basis prior experience of a given portfolio. For instance, women are often charged a lesser premium for the same risk.
“Current health status and lifestyle habits also play a significant role in premium determination. Apart from this, the product construct also determines how much you pay – whether you expect your capital back or also have a savings component built into the premium. Some of you prefer paying more for a short period and enjoying the coverage for a longer period beyond the payment years," said Gandhi.
Hence, the key factors that play an important role in determining the life insurance premium payment include – age, gender, health conditions, premium paying term, policy term, type of product selected, etc.
However, if you want to lower your premium and get good coverage, you may look at these five ways how you can save premium cost on life insurance policy purchase.
1. Get life insurance at an early age
Buying a life insurance plan at a young age like 28 - 30 comes with its advantages. When you buy a life insurance plan at an early age, it will be pocket friendly. As you grow older, you are loaded with more responsibilities and at that stage, a life cover becomes a necessity and becomes a bit expensive as per the increased age.
“With the increase in age, the premium also increases as you have more liabilities to pay. To put it simply, if you want to avail all the benefits of life insurance at a lower premium, it is suggested to buy a term life insurance policy as you start earning," said Santosh Aggarwal, Chief Business Officer -Life Insurance, Policybazaar.com.
2. Buy term insurance policy
Term insurance can be an essential financial tool in your overall investment portfolio as it protects your certainties, even in your absence. In pure term insurance, you pay a small amount of premium for a relatively large cover that is paid out only on the occurrence of the death of the insured. You can further enhance the coverage to include payouts on critical illnesses or accidental death. Such plans cover you for a long duration while the premiums are affordable.
Gandhi said, “As a thumb rule, a 35-year-old person should have at least 10-15 times their annual income as term insurance coverage to enable their family to tide over all possible financial needs in their absence." However, Gandhi said, “There is no survival benefit payable at the end of the term." This means that you will not get any maturity proceeds when your pure term insurance policy gets expired.
3. Choose the right policy term
It is not only important to choose the right policy term but it also assists you in saving premium costs on your life insurance policy. Naval Goel, Founder and CEO, PolicyX.com said, “The tenure of your life insurance policy should not be too short as it might lapse before you settle your financial obligations. On the other hands, the tenure should not be too long also because the premium charged would be too high because of the higher tenure. The best way to know the ideal term of your life insurance policy is to check by what year your liquid net worth, i.e., the total investment after subtracting your liabilities will be more than the chosen life insurance plan."
For instance, nowadays term insurance plans are available and provide coverage up to 40 years. However, in a practical scenario, it is difficult for a person to predict assets and liabilities for such a long term. Therefore, instead of buying a term plan for 40 years, one should ideally go for a term plan up to the expected retirement age which is normally 60-65 years. For say, if you are buying a term plan at the age of 40 years then you must buy term insurance for 20 years if you are expecting to retire at 60.
4. Compare plans before buying a life insurance
You can compare the insurance plans on aspects like premium, the sum assured and features offered. Besides, you must also compare the claim settlement ratio of different insurers as the claim settlement ratio play a major part when it comes to buying a term life insurance policy.
The claim settlement ratio helps let you know the percentage of insurance claims the insurer has paid out during a financial year. In other words, it is defined as the percentage of the total number of insurance claims paid out by an insurer compared to the total number of claims received.
For an instance, if an insurer says that their companies claim settlement ratio is 91 per cent, it means the insurer paid 91 out of 100 claims in a financial year wherein the remaining nine claims got rejected.
Some prominent online insurance market places allow you to compare different plans on various aspects and help you to save.
5. Do not buy unnecessary riders
When it comes to buying a life insurance policy, multiple riders are available at really affordable prices which can easily attract you.
A term insurance rider is an attachment or endorsement made in a term insurance policy that gives the policyholder additional coverage apart from the core offering of a death benefit. For instance, if you buy an accidental death benefit rider with the term insurance plan then during the policy term, if you pass away due to an accident, this rider will pay an additional sum assured, over and above the basic sum assured. The percentage of this additional sum assured payable to the beneficiary is calculated on the original term insurance sum assured.
Generally, the rider’s costs vary according to the term plan, the premium and the insurance company. Hence, it is important to do proper research before finalizing them to find out if the additional benefits match up with the premium charged. “Don’t forget to check the fine print of all the add-ons/riders as they can be different for different insurance companies," Goel said.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!