Whenever we buy a product or service, we have to pay a certain price for it. Exactly like, when purchasing insurance plans comes into existence, there is a premium that must be paid. It is called an insurance premium, and according to most policyholders, it more or less costs the same as the insurance policy. 

Technically, you get insurance against premature death in this case. Moreover, the insurance agency pays your benefactor a death benefit when there is an unprecedented incident. Due to this assurance, any firm charges a certain premium, including the risk cost that the firm is promising to insure you with. 

How To Calculate Insurance Premium? 

How To Calculate Insurance Premium

When it comes to calculating insurance premiums, there are various components. For starters, whatever the insurance agency will charge denotes the basic charge of insuring the risk. Apart from this cost, the premium might also include other charges like:

  • While issuing the policy, whatever administrative costs are incurred
  • The price of managing the policy
  • The distribution and sales costs

Each of these costs are combined to calculate the policy premium. Such calculations are done internally by the insurance firm. On buying the insurance policy, you are well aware of the aggregate premium for the coverage. This cost is variable from one provider to another. 

Read More: Homeowners Insurance Coverage And Its Associated Benefits

Factors Affecting Different Types Of Premium Calculation

It is true that the insurance agency puts a certain premium on every insurance policy. But, the actual insurance premium is reliable on various factors. These factors either decrease the premium or increase it. These factors might vary based on the type of policy you are willing to buy. Check out some common premium calculations and how different factors affect it:

1. Life Insurance Policy

The most common factors that affect life insurance premiums are age, medical history, family history, lifestyle habits, and sum assured. Your age is most likely to influence your death risk. Similarly, your medical history denotes that your premium might be boosted if you have present or past medical complications. 

In case somebody in your family has/had a disease, it might affect the premium rate. Additionally, the coverage has a direct impact on the premium. In case the sum assured is higher, you might have to pay a higher premium. 

2. Health Insurance Policy

In health insurance policies, the higher the age of an individual is, the more likely they are prone to illnesses. Hence, premiums for senior citizens might be a bit higher. Secondly, if you have present clinical conditions, there can be higher health risks and, consequently, higher premiums.

Next comes the sum insured. The premium charges will be higher if you choose a higher sum insured. Moreover, the premium is most likely to double if you cover more than two family members. The age of the members is also a significant consideration in insurance premium calculation. 

3. Motor Insurance Policy

In motor insurance policies, factors like the model, make, and variant of the car matter. If the car has a higher value, its premium will go up. Next, the date of registration of the vehicle also determines how old the vehicle is. If it is really old, it might have depreciated values and lower premiums. 

You might be a bit surprised to know that the registration location also plays a pivotal role. Usually, third-party policies are cheaper in comparison to comprehensive plans, provided the scope of coverage.

4. Travel Insurance Policy

The first factor that plays a detrimental role in measuring the insurance premium is destination. The place you are traveling to is important in deciding the amount of premium. Alongside this, your trip duration also plays a significant role. 

Travel insurance policies also consider age as a crucial parameter. For instance, if you have a higher age, you will be charged a greater premium. Furthermore, if two or more family members are insured under coverage, the premium might increase with each member’s premium addition. 

How Do Insurance Premiums Function?

On signing up for an insurance policy, you will be charged a premium by your insurer. You need to pay this amount for your policy. Policyholders might choose from multiple payment options for their premiums. Certain insurers let the policyholder pay the premium in monthly installments. 

On the other hand, others might need an upfront payment completed prior to the commencement of coverage. The premium price might also depend on other factors, such as:

  • Your age
  • Coverage type
  • The area where you live
  • Whether or not any claim has been filed previously
  • Adverse selection as well as moral hazard

Both health and life insurance premiums let you enjoy tax benefits. Life insurance premiums are qualified for Section 80C deduction as per 1961’s Income Tax Act. You will be able to claim some deduction on the premium account somewhere around $1800-1900. But the premium must be limited to 10% of the assured sum. 

If it’s a health insurance policy, premiums for yourself, your spouse, and your children are permitted under Section 80D’s deduction. The limits are different for people under 60 years and above. In such cases, the premium might be claimed under an additional deduction. This simply indicates that the deduction might have an addition to the family premium.

Read Also: What Is An Insurance Score: Have You Discovered What’s Yours?

Summing It Up

Insurance premiums refer to the cost that insures you against risk. A lot of insurance plans let you pay monthly or quarterly installments, called EMIs, too. Hence, once you assess your needs for coverage, you might choose the right insurance plan for you and your family. 

It is important to pick schemes and coverage that consist of affordable premiums. Pay timely premiums and ensure you enjoy the economic security that these plans offer. With this article at your disposal, here is an end to insurance premiums and its multi-faceted aspects. Don’t forget to comment below and communicate your thoughts to us.

Read Also:

With an adept skill of curating content on multiple genres, Mony has harnessed success as a Content Writer quickly. Find her sharing profound thoughts and opinions on finance, insurance and lifestyle niches.

Leave a Reply

Your email address will not be published. Required fields are marked *