It can be quite confusing to understand why you have to often pay a higher premium than others for a life insurance plan. These are the factors.
With growing awareness about insurance, an increasing number of people are buying insurance policies today. However, one of the questions that often gets asked is, why the price for similar offerings is different across different life insurers? Most of the times, you may also find two similar life insurance products in the same company having different premium. Let’s understand this in simple language.
First, we need to understand are we comparing like to like? Key factors for this include:
# Age, Gender, Lifestyle, occupation etc.
# Duration of premiums to be paid (premium payment term) and duration of cover period (policy term)
# Amount of cover on death (Death Sum Assured) and amount of benefit on survival/maturity
# When and how the survival and maturity benefits are paid
# Any additional coverage such as accidental death benefit or critical illness or waiver of premium etc.
# Type of policy – fully guaranteed benefits (non-participating) or fully non-guaranteed (such as ULIPs) or combination of two (such as participating policy containing bonuses).
The premium payable under an insurance policy is the consideration towards the cover or benefits that an insurance company promises to the policyholder upon happening of a certain event or at specified time. The premium in an insurance policy can also depend upon additional parameters, including but not limited to Gender, Health conditions of self and family etc. and may get influenced by the lifestyle, hobbies/avocation, and the type of job/business one is into.
The first and most important influencer is the policy type or the benefits payable under a policy.
A pure term policy will be the cheapest form of insurance since a claim is payable only upon death, followed by term with return of premium where, over and above a claim payable on death, premiums are returned if the insured person outlives the policy period. The savings plans will call for a higher premium compared to both term and term with return of premium since it intends to pay more than the total premiums paid on survival and/or on maturity.
The premium in a life insurance savings plan will depend upon the benefits, which may be fully or partly guaranteed under the policy, the cost of insurance as well as the amount of cover (Sum Assured) and the risk associated with the investment under the policy.
The amount of premium can be different from company to company because of multiple reasons, some of these are defined below:
a) The benefits and duration of premium payment – cost of insurance cover depends not just upon the age at entry but also upon the no. of years the premiums are payable and the duration of cover. If you are buying a long-term policy with premium being paid off in, say, 5/7 years, you are paying advance towards future and hence the premium will be higher.
Availability of extra covers that are built-in or optional like accidental disability or death, illness etc. can also increase the premium payable.
b) Target segment – the customer segment targeted by an insurance company also influences the premium. Insurance works on pooling of risk and hence the better the quality of lives in the pool, the lower the overall risk and hence the lower the cost.
c) Underwriting standards – Your policy can be issued without any medical examination or can be issued as point of sale (POS). Such policy typically has minimal underwriting and thus, may lead to higher premiums.
d) Duration of guarantees – The premium in an insurance policy is usually payable for a long duration, say, 5 /10 years for a policy term of, say, 20/30 years. Since the guarantee offered is defined at the outset of the policy, the insurance company will include cost of offering such long term guaranteed returns while calculating the premium.
e) Cost of distribution – This is one of the factors that influences the price. The lower the distribution cost, the lower the premium. Online versions of the policy, if available, are little cheaper for this reason.
The benefit illustration is the most important document to understand your policy and its benefits vis a vis the premiums to be paid. It shows a comparison of what you pay and what you can get. While all this holds true, there is an important angle to insurance saving plans – while your premiums may vary a little, the protection that they provide to your life moments is priceless.
(By Bikash Choudhary, Appointed Actuary and Chief Risk Officer at Future Generali India Life Insurance Company Ltd)