Understanding Insurance Premiums - Definition & Important Details

An insurance policy can be a vital support when an unforeseen event strikes. It provides financial protection from any unexpected loss or damage to one’s property or self.

There are various types of insurance policies like health insurance, life insurance, motor insurance etc. To become a policyholder, one needs to pay a fee known as the insurance premium.

What is an Insurance Premium?

An insurance premium is a fee that an individual or business needs to pay to the insurance company in order to receive the insurance benefits. In essence, the insurance premium is the cost of the insurance. These premiums may be paid in periodic instalments, monthly, quarterly or yearly. In some policies, it can also be paid upfront.

While purchasing an insurance policy, the insurance company calculates the premium that a policyholder must pay. Insurance companies use actuarial science to calculate the probability or chances that a policyholder will make a claim on the insurance. If the chances of making a claim are high, then the premium amount will be high too.

The insurance companies also consider several factors like the age of the insured person, health conditions, income etc., to come up with a premium amount. The premium collected by the insurance companies is pooled together and invested in securities to generate returns and cover the costs of the possible claims.

Why Understanding Insurance Premiums Is Important

It is important to know what is insurance premium for several reasons.

• Knowing your insurance premium can help make financial decisions. Once an individual knows their insurance premium amount, they can put that amount aside to make the payments. It can also help in managing finances or budgeting and saving money.
• Insurance premiums differ from company to company. Different policies have different premium amounts. Knowing your insurance premium is helpful as one can compare different policies and the benefits received for the premium that is being paid.

Key Factors That Influence Insurance Premiums

While calculating insurance premiums, there are several factors that an insurance company considers to charge a fair premium based on the chances of the policyholder making a claim. Here are some of the factors that affect insurance premiums:

Age

An individual’s age plays an important role in the amount that needs to be paid as an insurance premium. An insurance company may charge lower premiums for younger people, which is why it is beneficial and more cost-effective to purchase an insurance policy at a younger age. The premium is usually higher the older you are.

Medical conditions

The premium of health care and life insurance policies is significantly affected by the medical conditions of the individual. A higher premium is charged if an individual has underlying health conditions or severe illnesses.

Lifestyle

Certain individuals engage in activities that are considered to be risky. Activities like rock climbing, racing etc., could be dangerous and could lead to severe damage to life and property. Engaging in these activities could lead to higher premiums.

Habits

An individual’s habits are a factor that insurance companies take into account while calculating insurance premiums. Habits like smoking or drinking can have negative effects on one’s health and might lead to higher premiums.

Gender

Usually, the gender of an individual is also a deciding factor in the insurance premium. According to studies, women are said to live 5 years longer than men on average. Due to this reason, insurance companies may charge a lower insurance premium to women than to men.

Nature of employment

While applying for insurance, the insurance company considers an individual’s occupation. If a person is involved in an occupation which might pose severe risks of loss or damage to life, the insurance premium will be higher. The insurance premium for people involved in mining, oil, gas or construction is relatively higher.

Insurance Premium Tax Benefits

Apart from the several benefits that an insurance policy offers, one can even avail tax benefits by paying an insurance premium.

• Under Section 80C of the Income Tax Act,1961, the premium paid for life insurance can be claimed as a deductible from the taxable income. The limit of deductions under this section is Rs 1.5 Lakh.

• Deductions of up to Rs 25,000 for yourself can be claimed under section 80D for Mediclaim insurance.

• Furthermore, additional deductions of Rs 25,000 can be claimed for a spouse or family member too.

• The limit of the deduction is up to Rs 50,000 if the age of the insured is above 60 years.

Knowing what an insurance premium is, its features, and its benefits are helpful to anyone looking to purchase an insurance policy. It can help you make sound financial plans and manage your money accordingly. Having insurance offers many benefits and can help one save money, invest and protect themselves financially against any events that might lead to damage or losses.

FAQs

1. What happens If I cannot pay the insurance premium on time?

Insurance companies often provide policyholders with a grace period after the due date to pay the premium. If for some reason the premium is still not paid then the policy will lapse and the benefits will be discontinued. The premiums paid in the past will be forfeited as well.

2. How much premium should I pay for insurance?

The premium of an insurance policy depends on several different factors like the age, occupation, gender etc. The premium also differs from policy to policy. While paying an insurance premium you should consider your annual income and the coverage or benefits that the policy is offering for the premium.