Buying a term insurance policy is one of the most crucial financial decisions you can make for your family’s future. It provides you with simple, straight-forward protection in the form of a lump-sum payment made to your nominees in the unfortunate case of your death. The money can help them pay off EMIs, clear home loans, fund their education, and more. However, when looking to buy a term plan in India, you will realize that premiums are not the same for everyone. Two people who apply for the same sum assured could get different premium rates depending on various factors.
Understanding the way a term insurance Premium is calculated and can therefore help you make better decisions while choosing a suitable plan for your family. Calculating a premium is not done randomly or subjectively. It is based on objective, scientific evaluations of risk. Insurance companies use statistical data to determine how long a person is likely to live and the risk that the insurer would have to pay a claim during the policy term. The lower the risk, the lower your premium would be.
By understanding the factors that contribute to your premium calculation, you can make informed decisions while purchasing a term insurance plan. Here’s a list of everything that goes into the calculation of your premium:
Your Age & Life Expectancy
Age is an important pricing factor, but premiums are also influenced by health, lifestyle, occupation, sum assured, policy term, payment option and underwriting. The younger you are, the healthier you are statistically likely to be. As a result, the risk that the insurer would have to pay a claim on your policy is significantly reduced. For a level-premium term plan, the premium is generally determined at policy inception and remains as specified in the policy terms. Don't generalise this to every term insurance product.
Your Medical Profile & Family History
Your current overall health plays a major role in determining the rate at which you would be charged for a term plan. When filling out an application for a term plan, the insurer would ask you several pertinent questions about your medical history. These include your height, weight, body mass index, blood pressure, cholesterol levels, and any pre-existing medical conditions that you might have. If you have a good medical profile and lead a healthy lifestyle, you would be charged a much lower premium. However, if you suffer from diabetes or hypertension, the insurer would add an additional risk-based loading to your premium calculation. The company would also take a close look at your family’s medical history to determine whether you are likely to suffer from any hereditary diseases such as heart disease and cancer.
Tobacco & Substance Use
Lifestyle choices are also a major contributor to the calculation of your premium. Any kind of tobacco use, including gutkha and e-cigarettes, can reduce your life expectancy significantly. As a consequence, insurers load additional risk charges on top of your premium if you are a tobacco user. Moreover, alcohol consumption and extreme adventure activities such as skydiving and racing can also raise your premium.
Occupational Hazards
The job you do on a daily basis is another important determinant of your Premium. An individual who works in an office environment and sits throughout the day would be charged a standard rate for a term plan. However, jobs that involve working in hazardous environments such as underground mining, chemical handling, construction, aviation, and oil rigs would attract higher premiums because of the increased risk of accident.
Policy Duration & Sum Assured
The tenure of your term plan and the sum assured are two of the most important determinants of your premium. A higher sum assured, such as 1 or 2 crores, would cost significantly more than a 50 lakh sum assured. Similarly, a policy that covers you until the age of 75 would have a higher premium than a 50-year plan simply because insurers see a higher statistical risk in paying a claim on a longer-term policy.
Gender-Based Risk Assessment
Women on average tend to live longer than men all around the globe as well as in India. Consequently, the statistical risk that an insurer would bear when offering a policy to a woman is lower than the risk they would bear for a man. As such, most insurance companies in India offer discounts for women on term plans and other life insurance policies.
Calculating the premium for a term plan is a multi-step process. Here’s a look at the major steps that go into the calculation:
Actuarial Calculations
Actuaries within insurance companies begin the premium calculation process by conducting extensive research. These experts analyze India’s national population data in conjunction with mortality and health statistics to arrive at a ballpark figure. They determine average mortality rates for different age groups and genders. Based on this information, the actuaries determine the base premium that would be charged for every 1,000 rupees of sum assured.
Underwriting Process
After you fill out an application for a term plan, your application goes through the underwriting process. Here, the insurer analyzes your financial status, such as your annual income and medical test results. Normal medical results do not guarantee the base premium. Underwriting considers the applicant's complete risk profile, including age, lifestyle, occupation, medical history, income and other information.
Add-On Covers & Riders
Term insurance policies come with a variety of riders and additional covers that you can purchase for an extra cost. The most common types of additional covers in India include critical illness cover, accidental death benefit, permanent disability cover, and waiver of premium. Each rider offers you additional financial protection beyond the basic cover of your term plan. However, they also add on to your Premium. The additional covers ensure that you can get comprehensive financial protection without having to buy multiple life insurance policies.
Mode of Payment
Lastly, a term insurance company would calculate your premium based on the mode of payment that you select. You can choose to make monthly, quarterly, half-yearly, or yearly premium payments. However, insurers offer you a significant discount if you choose to make annual payments as opposed to making 12 monthly payments. This is because processing a single yearly payment is cheaper for the insurance company than processing 12 separate payments throughout the year.
To calculate your premium, you don’t need to perform any complicated mathematical calculations or interpret mortality statistics. You only need to use an online term insurance calculator and follow a few simple steps to estimate your monthly and yearly premium payments. The process is as follows:
Entering the Details
Begin by visiting a webpage that has a term insurance calculator. You then need to enter your personal and health details, including your age, gender, and tobacco use. You also need to enter your income and pincode. By entering accurate personal details, you ensure that the estimated premium that appears on your screen matches the actual premium that you would be charged.
Determining the Sum Assured
Next, you need to enter the sum assured that you wish to get for your family in case of your death. A common rule of thumb in India is that the sum assured should be at least 10-15 times your total income. This ensures that your family would be able to pay off all debts and expenses without having to worry about finances.
Entering the Policy Tenure
After entering the sum assured, you need to enter the tenure for your policy. Ideally, it should be chosen in a way that it covers your family until their greatest financial liability is gone. For most people, this means retiring at a certain age and having enough money to meet their monthly expenses for the rest of their lives.
Changing the Payment Modes
After entering the policy’s tenure, you need to choose a payment mode to finalize your premium calculation. A term insurance calculator would then show you the monthly and yearly premium that you would be charged. You can also use the calculator to compare different levels of sum assured, add riders, and change the tenure so that you can arrive at the perfect combination of tenure and sum assured.
Buy The Policy At The Earliest
The most effective way to reduce your premium is to buy the policy at the earliest possible juncture in your life. Buying a term plan when you are 25 as opposed to when you are 35 would reduce your premium by almost 50%. This is because the premium that you pay locks in for the entire policy duration. By buying a term plan when you are young, you can significantly reduce your premium payments for the entire duration of the plan.
Lead a Healthy Lifestyle
Maintaining a healthy lifestyle can keep you away from a variety of health conditions and diseases. It can also help you pass your mandatory medical tests for a term plan with ease. Exercising on a regular basis, eating healthy food, and keeping track of your body weight, cholesterol, and blood pressure are some of the best ways to ensure that you don’t get added risk loading on your Premium.
Quit Tobacco Use
If you are a tobacco user, quitting your habit before applying for a term plan can significantly reduce your premium. Most insurers consider you a non-tobacco user if you have successfully abstained from tobacco products for at least 12-24 months. Quitting tobacco use would also improve your health and extend your life expectancy.
Make Annual Payments
Always choose the option of making yearly payments as opposed to making monthly payments. Doing so would reduce your premium payments by almost 2-5% every year since insurers only load additional charges for processing monthly payments.
Buying a term insurance plan directly from the company’s website is always a better option than buying it from an offline agent. This is because buying online spares you from extra charges such as commissions and office maintenance fees that are added by agents in the case of offline purchases. As a consequence, you get a lower premium if you buy the policy online as opposed to buying it offline.
By understanding how your term insurance premium is evaluated, you can make better financial decisions for your family’s future. Your age, medical profile, and lifestyle choices determine your risk assessment, while tools like the term insurance calculator help you arrive at an affordable budget. In addition, you can also reduce your premium by buying a policy at a young age and making annual payments.
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