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How is Term Insurance Premium Calculated?

09 June 2022, 11:20 AM

Term insurance is more affordable as compared to other life insurance plans,  for it is a pure risk cover and has no investment component in it. 

The benefits of a term plan are valid during the specified duration of time called the ‘term’ of insurance, which is fixed by the life assured right from the start. If the person insured dies within this term, the death benefits can be availed by the nominees. Hence, in a term insurance plan, the value is generated only from the death benefit.

In the following discussion, we are going to explore the term insurance and calculation of term insurance premiums.

Let us begin with a thorough overview of the term insurance.

Term Insurance – An Overview

The term insurance spans over a fixed duration of time, such as 10 years, 20 years or 30 years, etc. Most of the companies offer level premiums for this duration and are called ‘level term policies’. This premium is deposited by the policyholder on a monthly, quarterly, annually, or limited premium payment basis. The insurance plans, the value of this premium, and the attached benefits – all of them vary across the companies. These plans might differ on a large scale in many other ways.

Hence, the premium amount depends on a lot of factors, such as health, life expectancy, and age of the policyholder. To avoid frauds, the insurance companies do a medical check-up of the person being insured. The company also looks into the family’s medical history to find about any critical diseases and illnesses.

Term Insurance Premium – What is it?

  • The premium is the amount you have to pay every month or every quarter or annually, or limited premium payment, single premium payment (depending on the insurance clauses).
  • This premium is fixed right from the start and is paid for the length of the insurance term.
  • In case the policyholder dies before the completion of this term, the nominee gets the face value of the policy.
  • In case, the person insured dies after the expiration of the insurance term, NO payout is given.
  • While the existing term insurance plan can be extended, the new premium is calculated. This calculation is done as per the health and age of the policyholder.
  • Hence, it is highly likely for the renewed policy premiums to be higher than the earlier ones.

How is Term Insurance Premium Calculated?

The premium for term insurance plans is calculated as per the following factors:

  • Age:

As a young person is less prone to any critical diseases, he or she will be paying more premiums for a term plan. On the other hand, the probability of an old person getting life-threatening diseases is extremely high. Hence, the old persons are the most likely to claim term insurance soon. So, the amount of premium is relatively lower for the young person as compared to an old person.

  • Gender:

Studies have revealed that women tend to have a longer lifespan as compared to men. So, they are going to pay more premiums, and the premium amount if kept lower as compared to the male policyholders.

  • Policy Term:

Policies with longer terms cover a person for a long time, during which the insured person is highly vulnerable to life and death situations, like accidents and life-threatening diseases. Hence, these policies are considered high-risk policies and come with higher premiums. On the other hand, short term plans cover a person for a small amount of time, and are thus, considered lower risk policies. Hence, the premium amount is smaller.

  • Profession:

There are certain professions that come with inherent risks to life and health, such as shipping, mining, and transport, etc. Professionals employed in such fields have to pay a higher premium as compared to the people employed in desk jobs.

  • Health of the Policyseeker:

In case the person being insured has poor health, such as he is obese, the policy premium is higher. This is because such people are highly likely to develop life-threatening conditions, such as cardiovascular diseases and diabetes, etc. If a person is fit and has no such indications, the policy premium is on the lower side.

  • Family Medical History:

Family medical history is another crucial factor affecting the amount of premium. Families with a history of critical diseases, such as cancer, etc are high-risk cases. This means that the person insured is highly likely to develop these diseases over time. In such cases, the policy premium is higher as compared to the low-risk family cases.

  • Lifestyle — Smoking and Drinking Habits:

Another key factor playing a crucial role in the premium calculation is the lifestyle of the policyholder. Smoking, drinking, and any other addiction are life-threatening. So, persons with such lifestyle and eating habits are high-risk cases. Hence, the policy premium is higher for them as compared to people with a clean lifestyle.

We hope this discussion proves helpful for all our readers. To find more about term plans, premium calculators, and other expert guidance, please leave your comments below.

Thanks for reading!

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