An Insurance Premium is the actual amount of money charged by insurance companies for active coverage. An insurance premium for the same service can vary widely among insurance providers, which is why experts strongly recommend getting several quotes before committing to an insurance policy. Insurance agents or brokers will take your basic information and calculate an insurance premium estimate based on your answers and other factors. The lowest quoted price on an insurance premium may be the better bargain, but the level of coverage may also be lower.
The cost of an insurance premium is largely based on statistics, not necessarily on individual habits or history. The sum assured is decided at the time the individual buys the insurance plan and the premium is paid accordingly. The premium consists of three important elements which individuals should know in order to opt for the right insurance plan.
a. Mortality charges
Mortality charges are incurred by the insurance company to cover the risk of an eventuality to the individual. The mortality expenses differ depending on the age of the individual and the sum assured- they are higher for a higher age and sum assured.
b. Sales and administration expenses
These expenses are incurred by the insurance company for operational purposes and recovered from the premiums that the individual pays towards his policy. Agent commissions, sales and marketing expenses and the overhead costs incurred to run the insurance business on a daily basis are examples of such expenses.
c. Savings component
This portion of the premium is invested by the life insurance company in various investment avenues like government securities, bonds, money market instruments and equities in varying proportions.
The savings component is what helps generate the returns which insurance companies pay to the policy holder by way of bonuses and the maturity amount.
The premiums charged by term plans cover only the mortality charges and sales and administration expenses. There is no savings element in the premium; hence no maturity amount accrues. It is also due to this reason that term plans are the cheapest form of life cover available.
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