What are Insurance Premiums and How do They Work?

An insurance premium is an amount that the insurance policyholders have to pay to get the benefits of their insurance policy. Insurance premiums work as income for the insurance companies that they get from the policyholders, in return for which, they become liable to provide coverage for the claims made against the policy.

These premiums are paid for healthcare, auto, life insurance, home and a lot more. If an individual or the organisation fail to pay the insurance, they may risk the cancellation of their policy. The amount of the premium depends on many factors, which will be different in different cases. Let’s understand the factors that affect the premiums’ amount.

Factors affecting the Insurance Premium Amount

The insurance premium depends on various factors and the insurance companies use these factors to decide your insurance premium amount. Here are those factors:

  • The type of coverage or insurance policy
  • Your age
  • Previous claims
  • The area/region in which you live

The premium amount for different types of insurance policies will be different. It will also be different for different coverage amounts, i.e., in general, the higher the coverage amount, the higher will be the premium. The premium amount also depends on the policyholders’ age, the amount will be lower for the younger people than the elder ones.

Also, if you have claimed coverage against any of your insurance policies before, it can increase the premium amount for the current period. Also, the area/region in which a policyholder lives can also affect the premium amount. Generally, the insurance companies estimate the risk and increase the premium amount if the risk is higher. For example, in the case of vehicle insurance, the premiums may be higher in urban areas than the rural/suburban ones.

Types of Insurance Policies in India

As we have discussed what an insurance premium is and the factors that affect the premium amount, let’s look at different types of insurance policies in India. Mainly there are 8 different types of insurance policies in India, where some are more common than others.

  • Life Insurance- Life insurance provides coverage to the nominee/family members after the death of the policyholder
  • Health Insurance-
  • Motor Insurance- Motor insurance, on the other hand, provides coverage against the damage/theft of the vehicles. Property insurance provides coverage against the damage of houses, buildings, etc.
  • Property Insurance-
  • Travel Insurance- Travel insurance is a short-term coverage plan and offers claims against the losses/accidents that occur during a trip
  • Mobile Insurance- Mobile insurance provides coverage against damage/theft of the mobile phone
  • Cycle Insurance- Cycle insurance, on the other hand, provides the same for your bicycle and may also provide accidental death coverage to the family members of the policyholders
  • Bit-Size Insurance- Bit-size insurance minimises the financial liabilities of the policyholders for a very limited period

There can be other types of insurance policies, which would be different from the ones mentioned above, depending upon the insurance companies. Life insurance, Health insurance, Motor insurance and property insurance are preferred by most of the policyholders.

Finding the Best Insurance Policy

If you are looking to buy an insurance policy for yourself or any family member, and you want to find the policy that suits you the best, then you can do it easily online. There are many platforms like Paytm Insurance that allow you to check and compare the premium amounts against the coverage sum of different insurance companies.

All you have to do is enter details like your age or the age of the person you want to buy an insurance policy for, your relationship with them, type of insurance policy, area, etc. Compare different platforms by entering these details to check the premium amount and the coverage of different insurers and then choose the one that suits your needs the best.

Benefits of Having an Insurance Policy

Life is full of uncertainties and we do not know when we find ourselves in an unpredictable and disastrous situation. Having an insurance policy is the best way to manage the financial losses in such situations; however, there are a few more benefits of having an insurance policy. It helps the cash flow management in an uncertain event but it can also provide you with investment opportunities such as unit-linked investment plans. Plus, you can also get tax benefits with your insurance policy.

Conclusion

An insurance premium is an amount that every insurance policyholder has to pay; in return for which, the insurers provide coverage against the losses as per the policy. When an insurance policyholder stops paying his/her insurance premium, he/she indirectly risk the cancellation of the policy.

FAQs
What do the insurance companies do with the premiums they receive?
Insurance premiums are the basic source of income for insurance companies. They use the amount received to pay for the coverage for the claims made against the policies. Also, the insurance company can invest some of the amounts to get higher returns. However, when an insurance company invests the amount received from premiums to various assets, they have to maintain a certain percentage of liquidity at all times.
What are some of the main factors that affect the premium amount?
Some of the main factors that may affect the premium amount are:
  • Type of insurance policy
  • Maximum coverage amount
  • Policyholder’s age
  • The area where the policyholder lives
  • Previously made claims by the policyholder
What is an Actuary?
An actuary is a person who assesses and manages the risk of insurance policies, financial investments, and other risky ventures. In insurance companies, actuaries have to calculate the risk involved and calculate the premium amount for the insurance policies.
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