Do you have an insurance policy or are you shopping for one? Don't just look at the benefits that a policy offers. You also need to understand the basics about your premium - how much you will have to pay, how it can affect your policy and what you should keep in mind when paying the premium. Here we explain these concepts for you.
What is premium?
When you buy an insurance policy, you expect the insurance company to compensate you or your survivors in case a certain event happens or period of time passes. However, in order to get this monetary benefit, you need to pay a pre-determined amount of money to the insurance company. This payment is known as the "premium" you pay to the insurance company. Premium is what the insurance company charges you to protect you. It can be paid either in regular intervals, or in a lump sum at the start of the policy coverage.
How is the premium amount calculated?
The insurance company considers many factors when calculating the amount of premium that any policyholder should be charged.
- Age and health of the policyholder
- Total amount of protection coverage sought from the insurance company
- Type of policy - term, endowment or unit linked plan
- The policyholder's current financial situation and income level
Premiums are decided based upon a number of factors such as the total amount of sum assured, the type of policy taken (whether term insurance, whole life or ULIP), the current financial ability of the person to take out the stipulated premium amount after considering his/her expenses, incomes and outstanding liabilities, and the age and health of the person insured.
What does the insurance company do with my premium?
An insurance company is basically a risk management operation. It receives money in the form of premium from 1,000s of different policyholders who it is contractually obliged to protect. However, statistics and actuarial analysis show that not every one of these policyholder will die or suffer injuries at the same time. So, its able to spread the risk of having to pay out a few policyholders across the premium payments made by 1,000s of policyholders.
The premium received by the insurance company is used to invest in differenct financial assets such as bonds, stocks and real estate. The investments over time generate a return and grow into a large pool of money from which the insurance company can pay out claims in case a policyholder dies or suffers injuries, as well as manage its own cost of operations.
What are the components of a premium payment?
The premium amount includes a "mortality charge" that the insurance company uses to cover the risk of an eventuality to an individual policyholder. This charge depends upon the age of the individual and the total amount of protection (sum assured) required. If the person is older, there is a higher mortality risk, so the charge is higher. Also, the higher the sum assured, the higher the mortality charge.
Another component is the sales and administration expense. Every insurance company incurs operating costs as well as costs towards agent commissions, sales and marketing expenses. So part of the premium covers these costs.
If your insurance policy, in addition to offering you basic life coverage, also offers you an investment product, then part of the premium is used towards making investments on the account of the policyholder. For instance, if a policyholder takes a market linked insurance plan (such as a ULIP), part of the premium goes towards an investment on the account of the policyholder.
How to pay the premium?
There are a variety of ways you can pay your premium:
- Insurance company's office
- Insurance agent
- Online banking
- Standing instructions to your bank when premium is payable
Please keep in mind that under the prevailing law the insurance company will not accept cash in case your premium amount is above Rs. 50,000. The payment will have to be made by cheque or electronic means.
What happens if I miss or don't make a premium payment?
Non-payment of premium can cause the policy to lapse. An insurance company usually provides a 30-day grace period (15-days if the payment mode is monthly) within which the premium has to be paid. It can also charge interest for the deferred payment and has the right to accept or decline reviving the policy.
Usually, you will receive a notice from the insurance company reminding you about your due premium payment. However, if you don't receive the reminder, you cannot hold the insurance company responsible.
What happens to a lapsed policy due to non-payment of premium?
A lapsed policy can be reinstated within a certain period. The policyholder has to pay the insurance company the accumulated due premium with interest. Some companies might also require a good health statement. The insurance regulator stipulates the norms to reinstate policies but every insurance company might have its own set of activities to revive a lapsed policy.
Can the premium amount increase at any stage?
An insurance policy is legal contract. One of the terms of the contract is the amount of premium that is fixed and that you need to pay in order to continue being insured. The insurance company cannot unilaterally increase the premium amount at a later stage, unless you have defaulted on your contractual obligation to pay your premium dues for a long period.
What if I have not paid premium for years - can I get any money back?
Different insurance companies have different policies on this. But mostly, if you have paid premium for more than three consecutive years, then a surrender value could be payable to you, i.e., an amount that the insurance company will pay to you for "surrendering" the policy. However, this would vary by plan type. Typically, the surrender value depends on the type of policy, amount of premium, policy term, number of years for which the premium has been paid and accumulated bonus, if any.
How can I lower the amount of premiums I pay?
One way is to offer to pay premiums annually rather than a monthly premium paying option. The more premiums you pay in a year, the higher will be your premium costs towards the policy. Do not purchase riders or additional benefits that do not add value to your insurance needs.
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