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What is an Insurance Premium? Understand how Insurance Premiums Work

Mar 20, 2020 | 4 months ago | Read Time: 3 minutes | By iKnowledge Team
What is an Insurance Premium

New policy premiums of India’s life insurance industry had grown by 41% and 16% in November and December 2019 respectively.[1] This just goes on to show the increasing number of people opting for life insurance policies, which is a positive trend. For all such new policyholders and prospective ones, too, here’s a primer on the premiums paid for insurance.

What is an insurance premium?

Put simply, an insurance premium is an amount paid for purchasing an insurance plan. An insurance plan is a contract between an insurer and an insured. Any valid contract has a consideration, and the consideration you pay for an insurance policy is called its insurance premium. Premium can be a regular monthly, quarterly, half-yearly, or yearly payment. It could even be a one-time lump sum payment, depending upon the policy terms.

Premium Rates

Your premium rates can differ, depending on a range of factors.

These factors include:

  • type of policy you opt for
  • age of the insured
  • Lifestyle habits like smoking and alcohol
  • medical history (diabetes, heart condition, etc.)

Insurers appoint actuaries to analyze these factors and assess the risks associated with a possible claim. The greater the risk, the higher is the life insurance premium.

Additionally, the rate of premium also increases with added benefits and riders, which are essentially add-on benefits such as disability benefits, critical illness cover, accident cover, etc.


In insurance terminology, a rebate is a discount offered to the policyholder upon their insurance premium.

  • A higher sum assured could get you a rebate, as the cost of servicing the policy reduces for the insurer. Basically, the servicing cost for each policy of one category is the same. Thus, the per unit cost of servicing becomes lower with a higher sum assured.
  • Higher the premium payment frequency, higher the servicing cost i.e. collection, deposit, administrative charges, etc. for the insurer. Hence, a lump sum premium or limited premium plan could get you a rebate, which will usually be pre-calculated within the life insurance premium amount.
  • Online payment eliminates the need for agents and their charges. Hence, a lot of companies provide rebates on online payment. It is a win-win as online payments are also more convenient for policyholders.

Types of Premiums

Depending on the policy terms and conditions, policyholders may be offered three broadly different types of premiums:

  • Level Premiums
  • Increasing Premiums
  • Decreasing Premiums

Level Premiums

As your mortality risk increases with age, so does your insurance providers’ liabilities. Consequently, the premiums levied would also see a spike. To make things simpler for the life insured, insurance providers average out the chargeable premiums over the course of the policy term (taking into account such spikes) and provide you with a level amount to pay throughout the term. This means that the amount of premium is fixed and does not change throughout the course of the policy. Most life insurance policies have level premiums.

Increasing Premiums

For those who do not wish to pay level premiums, increasing premiums, i.e. premium rates that increase over the policy tenure, can be opted for.

Decreasing Premiums

Decreasing premiums are applicable on a mortgage redemption policy. In such policies, the insurance premium decreases with a decrease in outstanding loan amount.

Late payment and non-payment

If life insurance premium isn’t paid when it’s due, a grace period is usually provided. You can pay your premium without extra charges. However, if you are unable to do so, your policy could lapse. You can also revive a lapsed policy by paying all overdue premiums along with interest, provided that your insurance company agrees to revive your policy.

Tax benefits

Tax Benefits

As per Section 80C of the Income Tax Act,

  • Premium paid for life insurance policy in the name of yourself, spouse or children is tax-deductible.
  • Premium payment for policy in the name of parents or any person apart from the ones mentioned above is not tax-deductible.
  • If you have multiple policies, you can combine all premiums together for tax benefit purposes.
  • These tax benefits are available for policies of public as well as private sector companies.

Now that you have a better idea of what is an insurance premium and what the various associated factors are, you can be better equipped to pick out a policy that offers maximum benefits at affordable rates. Make sure to conduct in-depth research so that you are completely sure about your options. To know about Aegon Life’s life insurance products like term insurance and other products, visit our home page.

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