Published in Economic Times.
The premium that you have to pay for a life insurance policy depends on various factors like age, total coverage (sum assured), your medical history, gender, lifestyle, and job.
However, the premium for the same life insurance coverage amount will vary from insurer to insurer.
What is life insurance and why you pay a premium?
A life insurance policy is a contract between an insurer and a policyholder. To make the contract valid, a premium amount is paid by the policyholder at the time of buying the policy and later at agreed intervals of time, depending on the frequency and mode of payment.
Life insurance is a way to provide your family (the nominees) financial support in case of the insured’s untimely demise. Generally, in the case of death the policyholder during the policy term, a pre-agreed amount (sum assured) is paid to the nominee.
Keeping the above view in mind, you must understand the following three important factors that are key determinants in the life insurance premium calculation for every insurer. The premium amount differs among insurers due to these factors when you compare their policies for the same coverage/sum insured.
1. Mortality and underwriting process
The process of underwriting determines your life insurance premium. In the underwriting process, various factors are taken into consideration like your age, gender, occupation (whether or not you are associated with a risky profession), lifestyle, policy tenure, any hereditary diseases in the family, and so on.
Rakesh Goyal, Director, Probus Insurance said that every insurer has a different underwriting process and assess risks differently. He explained, “Based on the assessment, each insurer may categorise the risk differently for the same profile, according to which they decide the lower or higher premium for their life insurance plan.”
Apart from this, life insurance premium is also calculated on an actuarial basis (a mathematical and statistical method to assess risk in insurance) that considers the probability of death occurring at particular age levels.
Santosh Agarwal, Chief Business Officer- Life Insurance, Policybazaar.com said that there is no methodology or standard formula to calculate premium as such, however, the insurer determines the risk of death associated with the person in the underwriting process and charges the premium accordingly. “It is assumed/estimated on the basis of the fact that for a 50-year-old person the premium will be usually higher as compared to a person of a younger age as broadly the insurance premium is determined on the basis of their probability of falling ill, any existing diseases, etc.,” she added.
2. Expenses and profit margins
The premium amount varies across several insurers because the premium not only depends on the factors related to the policyholder but also on factors related to the insurer, that is, the expenses incurred by the insurer in writing the policy. “For life insurance plans the premiums may differ because insurers will have different cost structures, assessment of risk and investment returns. So, although the factors used to determine premium are the same the outcomes will be different,” says Kapil Mehta, CEO, SecureNow.in
You may generally not notice the expenses factor in your premium amount. However, you must know that the operational cost is also added to the policy premium.
The operational costs may include office expenses such as the cost of policy document, the insurance agent’s commission, and other overhead expenses of the insurer.
Agarwal said, “Once the insurer arrives at the risk cost analysis factors related to policyholder, the insurer adds expenses to the insurance premium. Generally, insurance companies add operational cost along with the expected profit margin to arrive at the final premium amount.”
The profit an insurance company can make from an insurance policy plays an important role in deciding the final insurance premium of your life cover plans. This is why premiums for the same amount of coverage from insurer to insurer varies.
3. Exigency element
Different factors are involved while calculating life insurance premium. One of the minor contributors to the premium is contingency charges. For instance, the number of claim settlements cannot be estimated, that is, how many claims an insurer will receive during the year is actually not known.
Goyal said that although contingency contribution to premiums is not too much for policyholders individually to bear, it does play a significant role for an insurance company. In case of unforeseen or unavoidable situations or an unanticipated large number of claims in a year, the inclusion of contingency factor in the premium spread over a large pool of customers helps companies to maintain their finances. He said, “Some of these unpredictable instances include death claim settlement ratio, natural or man-made perils, changes in the regulation, new amendments, failure of a newly launched product as expected, and so on. Consequently, it can ultimately put the insurance companies’ investment at stake.”
Hence, this way contingency part of premium charged also adds value to the financial and investment stability of the company and at the same time adds minimal value change in the premiums.
Should you opt for a life insurance policy on the basis of lower premium?
Ideally, claim settlement ratio should be a good starting point for short-listing insurance plans. This is because a higher ratio gives you the assurance that at the time of claims, it would have a greater chance of being approved.
Mehta says, “For term insurance, pick insurers that have over a 95 percent claim settlement ratio and the lowest premium. For other life insurances, look at these three factors: a relatively higher implied investment return projected in the illustrations, a high death benefit provided and relatively lower surrender charges.”
Media
