When you purchase a life insurance plan for the first time in your life, you’ll realize that you have no control over your insurance premiums that you need to pay. It’s the insurance firm that determines an ideal premium for you, and you have only two options – either accept it or let the offer go.
Moreover, as you’ve never experienced it before, you might never wonder about the criteria used to calculate the insurance premium. Knowing how to calculate the premium you need to pay allows you to plan your future in a better way, and figure out whether the offer is suitable for you or not.
Below is a quick rundown of factors that you need to consider for calculating your insurance premiums the right way:
Table of Contents
1. Interest
The premiums that you pay to your insurance firms are invested in stocks, real estate, bonds, and various other financial instruments. Assuming that an investment offers you a specified rate of interest, the earning through it will be included in the premium calculation of your plan.
2. Mortality Cost
Mortality cost is the amount that insurance firms need to pay to the policy holder’s dependents. While determining this cost, the insurer will consider your health history, age, employment, driving records, hobbies, and various other things.
3. Decreasing Payout
The amount of your insurance premiums is influenced heavily by whether you choose to have a fixed cover amount for your entire policy duration, or use a quantum of protection decrease to get consistent payments every year.
4. Occupation
Insurers consider some occupations to be riskier than the rest, and that’s why insurance premium differs majorly between people with different occupations. Professionals like industrial workers, soldiers, pilots, and anglers have to pay a higher premium than people working in offices or shops.
5. Alcohol and Smoking Consumption
Whether you smoke one cigarette a day or consume the whole packet, insurers will still consider it the same, and it will have the same effect on your insurance premium. Similarly, other addictions such as alcohol make your premiums higher.
6. Covers
The type of cover you choose for with your life insurance plan determines your premiums as well. For instance, if you take joint life cover along with your spouse, you’ll likely have to pay a higher premium because there’s a higher chance of the policy getting claimed in the future.
7. Operating Cost
The total costs incurred for operational duties of the insurance firms, including non-marketing and marketing expenses like rent, salaries, maintenance, commissions, and legal fees influence your premium amount to a great extent.
8. Medical History
While calculating your premiums, your medical history plays a significant role in the final decision. The company examines your health condition properly to highlight your financial requirements in the future properly and decide on a premium amount.
However, if you have any critical health issues in the past or are diagnosed with one in the present, you need to know that it will affect your premiums significantly. Mostly, if you have a life-threatening disease, you’ll likely have to pay a higher premium.
How to Calculate Your Life Insurance Premium with A Good Accuracy?
As life insurance is such a crucial financial decision of your life, the insurers keep a large number of factors in mind before determining the right premium amount for you. Here’s how to calculate life insurance premium using some pre-defined factors:
1. Time of Purchasing the Policy
Although there’s no such thing as a good time or a bad time for buying an insurance policy, you can get a slew of benefits by purchasing a plan at a younger age. The insurance company assesses your risks, and at a youthful age, you’ll possess lesser risks and gain a comparatively lower premium.
That’s because a young person is less likely to suffer from a chronic disease, than a person who’s in their retirement age. Moreover, when you choose a plan at a young age, you can easily spread the duration of your insurance and decrease your premiums even more.
2. Required Policy Coverage
When talking about life insurance, keep in mind that it differs greatly based on policies, designed to support people with different financial requirements. An insurance provider will determine your investing abilities and requirements to come up with an ideal plan for you.
Moreover, as you add more riders to your plan for strengthening the coverage, you’ll notice that your premium amount will also increase. Therefore, make sure you consider your requirements carefully, and add riders only when you feel they’re crucial.
3. Ideal Coverage Amount
The ideal amount of coverage that your family needs for a financially-secure future depends on your family’s current and predicted financial condition soon. Mapping out your main expenses, along with any unfortunate circumstances can help you calculate your premium properly.
As a general rule of thumb, the lesser your coverage is, the lower premium you have to pay to the insurance company. Additionally, your lifestyle and the number of families dependent on you also help in determining the ideal coverage required in your plan.
The majority of the insurance service providers will depend on your personal information such as credit history, driving records, occupation, lifestyle, and habits to assess your risk profile and use the figures in calculating your premiums.
The Takeaway
To make the most out of your insurance policy at a genuine price, you need to make sure that you take the efforts and time required to learn how to calculate life insurance premiums. If you read this far, you probably now have a better idea about your estimated insurance premium.
Make sure you self-assess yourself for the factors given above and determine whether you’ll have a higher or lower premium amount. Additionally, while being assessed by an insurer, make sure you keep all your details transparent and never try to hide away any fact from them. Otherwise, your dependents may not be able to claim the return in the future and risk their financial future. Click here to know more.
