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How is Term Insurance Premium Calculated? Research Team | Posted On Saturday, January 05,2019, 03:13 PM

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How is Term Insurance Premium Calculated?



What is term insurance?

Term insurance plans are an agreement between the insurer and the insured, where the insurer promises to provide life cover for a specified period of time in exchange for a premium. Term insurance plans are affordable and offer financial security to the dependents of the family in case of unforeseen events. All the leading insurers offer term insurance plans.

If the policy holder dies within the policy term, a death benefit is paid by the insurer to the beneficiary/nominee. However, there is no survival benefit for term insurance plans and the policy holder has to forego the amount he has paid in premiums if he survives the term of the policy.

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SEE ALSO: Review Your Insurance Plans With IndianMoney

How is Term Insurance Premium Calculated?

Documents required for Term life insurance policy:

The insurer requires some documents to be submitted for availing a term insurance plan:

  • Proof of income: salary slip of previous 3 months/ form 16/ income tax returns.
  • Proof of identity: PAN card/ Aadhaar card/ voter ID card or passport
  • Proof of age: Birth certificate/ Driving Licence or school leaving certificate
  • Proof of address: Ration card/ Voter card/ Aadhaar card or utility/ telecom bills

SEE ALSO: Joint Term Insurance Plan or Two Separate Term Plans Which Option Is Better

Benefits of availing term life insurance plan:

  • Affordable premiums:  One of the main benefits offered by term insurance plans are high coverage at low premiums.
  • Longer tenure: a tem plan provides coverage for up to 75 years of age.
  • Income tax benefits: An individual can enjoy tax deductions on premiums paid towards the term insurance policy under Section 80C of the income tax act up to Rs 1.5 Lakhs a year.

SEE ALSO: Joint vs Individual Term Insurance: Which Is Better?

 How Is Term Insurance Premium Calculated?

The rates imposed on your term insurance policy are calculated by considering various factors like age, gender, lifestyle and habits, occupation, city of residence and so on. The premiums are calculated considering the various risks that might arise in the life of the insured person. Lower the risk of a claim arising for an insured event, lower would be the premiums.

Age: It is one of the main factors in determining the premium on your term insurance policy. It is best to avail a term insurance policy at a young age (Just when you start working). The premiums would be low as you are generally young and healthy. As you grow older, there are chances of health getting affected by various health related factors. So, the premiums tend to be higher for people who buy term insurance plans at middle age.

Gender: studies have shown that the average life expectancy of woman to be more than that of men. So, the insurers charge a lower premium for woman as insuring the life of a woman is less risky compared to insuring a man.

Occupation: An individual’s occupation is also an important factor in calculating and determining the premium amount. Some occupations like soldiers, army, miners, fishermen and jobs in gas or oil industry are considered as risky occupations by the insurance companies. Therefore, people working in these sectors pay a higher premium considering the life risks these jobs have, vis-a-vis other professions.

Geographical Location: the place of residence of a person is also an important factor that decides the premium amounts. People residing in areas that are prone to disasters or natural calamities pay a higher premium than people living in other places. This is because the chances that these people might get affected by natural disasters is quite high.

Height and Weight: the insurers also consider factors like height and weight, while calculating the premiums on the term insurance policies. This condition decides whether or not an individual has healthy body weight according to his height called BMI or Body Mass Index. If the person is overweight, then it is likely that he might suffer from weight related medical problems in the future like diabetes or heart ailments. Consequently, this affects the premium amounts of the insured.

Life Style Habits:

1. Smoking or Tobacco Use: this clause is a key factor in determining the premium amounts on the term insurance policy. It states that the premium of the term insurance policy is lower for non-smokers. If an individual has used or consumed tobacco related products in the last 12 months, then he is considered a smoker. In this case, the smokers pay a higher premium on their term insurance policy as they possess a greater risk of contracting a life threatening disease vis-a-vis a non smoker.

2. Alcohol Consumption: It is a fact that people who drink on a regular basis, are at high risk of alcohol related health problems. Drinking on a regular basis above a recommended limit, can lead to ailments like liver diseases and reduce the life expectancy of an individual. This in turn affects the premiums the insurance company charges.

3. Medical History: the medical history of the applicant plays a vital role in determining the premium amounts that must be paid. In case the applicant has suffered from any major illnesses in the past or is currently suffering from one, then he must pay a higher premium.

Family Medical History:  the family medical history of the applicant can also affect the premiums of his term insurance policy, negatively. If a family member of the policy holder gets affected by chronic illnesses at an early age, then it might affect the premiums. The reason being the applicant can also get affected by the same diseases at a later stage in life.

Sports and Hobbies: People who are adventure sport enthusiasts are likely to meet with accidents and have a higher risk profile than others. People who take up sports like sky diving, rock climbing, skiing, water sports or horse riding as hobbies are likely to pay a higher premium.

There are some other factors that also affect the premium of the applicant like marital status, Number of dependents, foreign travel and so on. If you are availing any additional riders with your term insurance policy, this will increase premiums. However, it is important to inform your insurer on all your personal information while buying a term insurance policy. Do not hide any details related to your health or lifestyle, as it may lead to rejection of your claim.

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