What is Life Insurance Premium and How is it Determined?

bySurobhi BoseLast Updated: March 13, 2024
What is Life Insurance Premium and How is it Determined

A life insurance policy is a must-have for every individual to ensure the financial security of the family and loved ones. However, to purchase the most comprehensive plan, it is important to keep in mind the various aspects of it. One of the most important aspects of a life insurance policy is the premium rate. Further in this article, we have elaborately discussed the life insurance premium and how it is determined.

What is Life Insurance Premium?

A life insurance policy is an agreement between the insurer and the policyholder wherein the policyholder receives the insurance coverage as a sum assured in return for the premium paid towards the policy.

The life insurance premium is the amount paid by the policyholder at the time of purchasing the policy. The policyholder can choose from the different premium payment options (single pay, limited pay, or regular pay) to pay the premium of the policy. The premiums can be paid in monthly, quarterly, half-yearly and annual modes.

What are the Factors that Determine the Premium Rate of the Policy?

There are various factors that determine the life insurance premium rate. The insurance companies calculate the premium rate considering the factors like age, lifestyle habits, health conditions, etc. Let’s take a look at these factors in detail-

  • Age

This is one of the most important factors considered by the insurance companies while calculating the premium rate of the policy. An insurance buyer is perceived to be at a lower risk, health-wise when they are young, thus for younger policy buyers, the cost of the life insurance policy is also low. Also, young individuals are expected to have longer policy coverage and premium payment tenure, which is profitable for the insurance company in the long term. Thus, the life insurance premium rates are low for younger policy buyers.

  • Health Conditions

People suffering from pre-existing illnesses pose a high risk for the insurance company, therefore, they need to pay a higher premium as compared to the individuals who are healthy. This is because the chances of making a claim are higher among people already suffering from any ailment.

  • Gender

This is another factor that determines the premium rate of the life insurance policy. The female policy buyers are required to pay a lower premium as compared to male policy buyers. This is because men are perceived to be at higher risk and have a low life expectancy.

  • Lifestyle Habit

People who are addicted to smoking and drinking have high chances of developing critical illnesses like lung diseases, cancer, etc. Therefore, if an individual falls under this category, then they will be required to pay a higher life insurance premium.

  • Occupation

If an individual is employed in a high-risk industry like mining, construction, etc. then they will be charged a higher premium. On the other hand, the people working in offices are less likely to meet with an accident, thus, the premium rates are also low for them.

  • Policy Tenure

If an individual buys a policy with a longer policy tenure, then they have to pay a lower premium amount. A long-term life insurance policy ensures a longer flow of premiums for the insurance company, hence, the insurer charges a lower premium with longer coverage.

  • Premium Payment Term

The policyholder who pays premium yearly saves some amount as compared to the insurance buyers who pay premiums on a half-yearly, quarterly, and monthly basis. In the case of yearly premium payment, the insurance company saves regular administrative costs, thus the annual premium is fixed at a lower rate than a quarter, and monthly installments.

  • Medical History

This is another major factor that impacts the life insurance premium rate. The insurance companies ask for medical records before issuing the policy. In case a policy buyer has a history of medical conditions such as heart disease, diabetes, etc., then the premium amount of the policy increases automatically. In some cases, the insurer may even reject the application.

Here are some of the policy-related factors that affect the life insurance premium rates:

  • Whole Life Vs Term

A whole life insurance policy provides coverage for the entire life i.e. until the death of the life assured or up to the age of 99 years. Thus, the premium rate of a whole life insurance policy is higher as compared to the term insurance plan that provides coverage for a specific tenure.

  • Riders

If the policyholder opts for any rider option while purchasing the life insurance policy, then the premium of the policy increases simultaneously.

The Bottom Point!

To get the best coverage at a lower premium rate, it is very important to take the required time and effort to do proper research. By keeping the above-mentioned factors in mind, one can evaluate the approximate premium rate of the policy and choose the most comprehensive plan for their family.


How to calculate the premium rate of the life insurance policy?

The policyholder can make use of a life insurance premium calculator to calculate the approximate premium rate of the policy.

Do life insurance riders cost an extra premium?

As life insurance riders are add-on cover offered by the policy, the policyholder needs to pay an extra premium to add riders to the base plan.

Does the tenure of the policy affect the life insurance premium rate?

Yes, the premium rates for a life insurance policy with a longer tenure for 25-30 years are less as compared to the premium rates of a life insurance plan with a policy tenure of 10-15 years.

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